A Republic— If We Can Keep It

A Republic—

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Cover design by Courtney Hechler To those many young people whom we’ve been blessed to teach over the years and who are helping to keep the torch of liberty lit. Original versions of the included articles can be found on the website of The Freeman, www.TheFreemanOnline.org, or that of the Mackinac Center for Public Policy, www.Mackinac.org.

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Preface

Economics as it is taught today is replete with fallacies. So is History. Combine the two into Economic History and you frequently get a witch’s brew of mumbo jumbo. The Industrial Revolution was a setback for workers. Free markets caused monopoly and exploitation. Government intervention was required for economic growth and for economic recovery. These are but a few of the many misconceptions that constantly need revisiting, and are addressed within this volume. The authors recognize that both economics and history must be about much more than numbers. That’s why many of the offerings here focus on the interesting contributions of people who changed the course of events. One of the essential points we hope readers of this anthology will come away with is the critical importance of specific individuals in shaping the course of the amorphous collective known as “society.” Almost all of the chapters herein first appeared in The Freeman, the journal o f the F oundati on for Economic Education (FEE). We invite readers to visit FEE’s website, fee.org, and also our Facebook pages. Our original intent in assembling this anthology was to provide teachers of history, economics and economic history with a companion text of readings. We hope this collection will be of interest to a wider audience as well, especially to those who support the ideas and philosophy of the free society. We thank our friend Doug Bandow of the Cato Institute for his assistance in organizing the chapters and devising the unit headings. We also thank Micha el Nolan of FEE for his assistance in editing and layout. We give special thanks to the Earhart Foundation of Ann Arbor, Michigan for its support of this volume.

Table of Contents

I. Principles of Limited Government

3 Chapter One: The Holiday That Isn’t 7 Chapter Two: The Founders, the Constitution, and the Historians 11 Chapter Three: Madison’s Veto Sets a Precedent 15 Chapter Four: Principled Parties 19 Chapter Five: Andrew Johnson and the Constitution 23 Chapter Six: A Supreme Court to be Proud Of 27 Chapter Seven: Two Presidents, Two Philosophies, and Two Different Outc omes 31 Chapter Eight: Andrew Mellon: The Entrepreneur as Politician

II. The Trials of Unlimited Government

37 Chapter Nine: Where Are the Omelets? 41 Chapter Ten: The Times That Tried Men’s Economic Souls 45 Chapter Eleven: The Forgotten Robber Barons 49 Chapter Twelve: Teddy Roosevelt and the Progressive Vision of History 53 Chapter Thirteen: Of Meat and Myth 61 Chapter Fourteen: Our Presidents and the National Debt 65 Chapter Fifteen: The Progressive Income Tax in U.S. History 69 Chapter Sixteen: Cigarette Taxes Are Hazardous to Our Health 73 Chapter Seventeen: A Man Who Knew the Value of Life and Liberty

195 Chapter Thirty-Seven: Lessons from the First Airplane III. Our Cousins Stand for Liberty 199 Chapter Thirty-Eight: Subsidies Hurt Recipients, Too 203 Chapter Thirty-Nine: A Tribute to the Jitney 79 Chapter Eighteen: Scotland: Seven Centuries Since William 207 Chapter Forty: In the Grip of Madness Wallace 83 Chapter Nineteen: Happy Birthday, Adam Smith! VI. Depressions, Poverty and Inequality 87 Chapter Twenty: A Man Who Didn’t “Grow” in Office 91 Chapter Twenty-One: Prophets of Property 213 Chapter Forty-One: Great Myths of the Great Depression 95 Chapter Twenty-Two: Wilfrid Laurier: A Canadian Statesman 243 Chapter Forty-Two: The 1932 Bait-and-Switch 99 Chapter Twenty-Three: From Crystal Palace to White Elephant 247 Chapter Forty-Three: Child Labor and the British Industrial in 100 Years Revolution 255 Chapter Forty-Four: Government, Poverty and Self-Reliance: IV. The Positive Power of the Entrepreneur Wisdom From 19th Century Presidents 271 Chapter Forty-Five: The Silver Panic 105 Chapter Twenty-Four: From Kleenex to Zippers: The 285 Chapter Forty-Six: Public Money for Private Charity Unpredictable Results of Entrepreneurs 289 Chapter Forty-Seven: Equality, Markets, and Morality 109 Chapter Twenty-Five: A Camera Reaches 100 113 Chapter Twenty-Six: Charles Schwab and the Steel Industry VII. Individuals Against Government Injustice 129 Chapter Twenty-Seven: Herbert Dow and Predatory Pricing 137 Chapter Twenty-Eight: Witch-Hunting for Robber Barons: The 295 Chapter Forty-Eigh t: The Inspiring Story of Thomas Clarkson Standard Oil Story 303 Chapter Forty-Nine: The Liberty Tradition Among Black 149 Chapter Twenty-Nine: John D. Rockefeller and His Enemies Americans 153 Chapter Thirty: It Wasn’t Government that Fixed Your Clock 307 Chapter Fifty: The Costs of Segregation to the Detroit Tigers 157 Chapter Thirty-One: History for Sale: Why Not? 311 Chapter Fifty-One: Elijah McCoy and Berry Gordy: Ingenuity Overcomes V. The Negative Power of the Bureaucrat 315 Chapter Fifty-Two: The Story of Nicholas Winton

163 Chapter Thirty-Two: John Jacob Astor and the Fur Trade: VIII. The Big Government Warfare State Testing the Role of Government 173 Chapter Thirty-Three: Why Did the National Road Fail? 323 Chapter Fifty-Three: James Madison: The Constitutional War 177 Chapter Thirty-Four: Should Government Build the Railroads? President 187 Chapter Thirty-Five: Death by Public Works

191 Chapter Thirty-Six: The Origin of American Farm Subsidies 327 Chapter Fifty-Four: The Economic Costs of the Civil War 333 Chapter Fifty-Five: Spanish-American War: Death, Taxes, and Incompetence 337 Chapter Fifty-Six: Don’t Expect Much From Politics Part I

341 About the Authors

Principles of Limited Government

Chapter One

The Holiday That Isn’t

By October, most people have already begun to think of the holidays just around the corner. We each observe the traditional ones according to our personal wishes—a precious right won for us by past and present patriots. Allow me to advise you, however, not to let this year end without taking note of “the holiday that isn’t.” It’s not recognized officially, and few Americans r eally know of it. I had to be reminded of it by a frie nd from Arizona, Roy Miller, one of the founders of the Goldwater Institute. The day is December 15. It was on that date in 1791 that the fledgling United States of America formally adopted what we know as the Bill of Rights, the first ten amendments to the Constitution. Miller says, “Few days in American history were more critical to securing or proclaiming the principles behind the nation’s founding.” A “Bill of Rights Day” is not on the calendar, but a free people don’t have to wait for Congress to declare a holiday to celebrate one. On December 15, take a moment to reread the Bill of Rights and reflect on its importance. Call it to the attention of friends and family. Without an agreement that a Bill of Rights would be added or without a consensus 3 4 A Republic—If We Can Keep It The Holiday That Isn’t 5 of what they would do, the Constitution itself would probably not have and limited government. Even the least libertarian among them would been accepted. The ten amendments ultimately adopted guarantee be horrified if he could see how later generations have ballooned the freedoms of religion, speech, the press, peaceful assembly and petition; size and intrusiveness of the federal establishment. It never occurred to the rights of the people to keep and bear arms, and to hold private the most ardent Federalist that government should rob Peter to pay property; rights to fair treatment for people accused of crimes, Paul for his health care, art work, alternative energy, prescription drugs, protection from unreasonable search and seizure and self- hurricane relief, or his notions of regime change in Somalia. incrimination; and rights to a speedy and impartial jury trial and representation by counsel. The Constitution and Centralization In this modern and supposedly enlightened age, not many people among the world’s 7 billion can honestly say they enjoy many of these So even without the Bill of Rights, the Constitution represented a rights to their fullest—or at all. Even in America we have to work hard huge advance for civilization. But during the ratification debate, enough to educate fellow citizens about the liberties the Bill of Rights is meant citizens were wary of any centralization of power that they wanted to to protect. There are plenty in our midst who would sacrifice one or go further. I think they instinctively understood something that Thomas more liberties for the temporary and dubious security of a government Jefferson once so aptly expressed, “The natural progress of things is for program. In June 2008 the Supreme Court affirmed the right to keep liberty to yield and government to gain ground.” When the and bear arms but only by a 5–4 vote. No wonder Benjamin Franklin Massachusetts legislature made it clear it would not ratify the said the Constitution gave us “a republic, madam, if you can keep it.” Constitution unless language was added to strengthen individual rights, it triggered a movement among the states to do just that. In the grand scheme of American liberty, how important is the Bill of Rights? It’s fundamental and foundational, and about as bedrock as it Madison is regarded as the “Father of the Constitution” because he gets. In fewer than 500 words, many of our most cherished liberties are was its primary author and, along with Alexander Hamilton and John expressed as rights and unequivocally protected. It’s a roster of Jay, part of the trio that wrote the Federalist Papers in its defense. On instructions to government to keep out of where it doesn’t belong. It the matter of amending it with a Bill of Rights, he was at first opposed, bears the heavy imprint of a giant of republican government, James being of the view that enumerating some rights in the form of Madison. amendments would open the door to government violations of any that were not listed. He eventually met that very objection by devising what Why did such critical protections end up as amendments instead of became the Ninth Amendment: “The enumeration in the Constitution, of as core elements of the primary document? Here’s the background: certain rights, shall not be construed to deny or disparage others The Second Continental Congress, originally convened in 1775 at retained by the people.” Madison became one of the most eloquent the outbreak of hostilities with the mother country, adopted the Articles defenders of the Bill of Rights, and it is unlikely the Constitution would of Confederation as the new nation’s first formal, national government. have been ratified without him or them. Some Americans came to believe by the late 1780s, however, that the In 1789 New Jersey was the first state to adopt the ten amendments Articles were weak and inadequate. The Constitutional Convention of that would become the Bill of Rights. When Virginia did so on December 1787 produced a draft Constitution to replace them, subject to 15, 1791, they became part of the supreme law of the land. (Actually, 12 ratification by the states. A great debate ensued and people lined up in amendments were sent to the states, but two failed to win enough one camp or the other—the Federalists or the Antifederalists. The states to be ratified. The unratified amendments, originally numbers 1 former favored the Constitution and in most cases, at least at first, and 2, set the ratio of House representative to population and forbade without any amendments. The latter either opposed it altogether or congressional pay raises to take effect “until an election of condition e d their approval on adoption of stronger protections for Representatives shall have intervened.” The latter was ratified as the individual liberties. 27th amendment in 1992.) Keep in mind that virtually all the leading figures in this great debate were libertarians by today’s standards. They believed in liberty 6 A Republic—If We Can Keep It

If you want to bone up on the Bill of Rights before December 15, check out the website of the Bill of Rights Institute (billofrightsinstitute.org), which produces instructional materials and 2 sponsors seminars about America’s foundational documents. Some excellent books to consult on the subject include We the People by Forrest McDonald, Fighting for Liberty and Virtue by Marvin Olasky, Simple Rules for a Complex World by Richard Epstein, and Restoring the Lost Constitution: The Presumption of Liberty by Randy Barnett. —LWR, October 2008

Chapter Two

The Founders, the Constitution, and the Historians

The first step in getting Americans to disregard the Constitution is to get them to distrust the men who wrote it. This assault on the Founders, subtle at first, began in earnest almost 100 years ago. The first historian to challenge the motives of the Founders was Charles Beard in An Economic Interpretation of the Constitution of the United States (1913). In this landmark book, Beard, a professor of history at Columbia University, argued that the Constitution was “an economic document drawn with superb skill by men whose property interests were immediately at stake.” The Founders, then, rather than being patriots, wise lawmakers, or thoughtful students of government, were primarily in the Constitution-writing business to protect their “property interests.”

Conflicts of Interest The Founders’ economic motives, according to Beard, were straightforward—they were owed money from their support of the

7 8 A Republic—If We Can Keep It The Founders, the Constitution, and the Historians 9

Revolution, and those “public securities” (receipts for loans made to described as errors in research and, less generously, as fraudulent support American independence) were not being repaid under the research. McDonald traveled to archives throughout the original 13 weak Articles of Confederation. A stronger governing document was states and meticulously compiled data on thousands of men involved in needed to e ase the tra n sfe r of tax d o llar s from ordinary c itizens into th e the debate over the Constitution. After systematically studying the lives pockets of the more affluent Founders. of the Founders and the state convention delegates, McDonald wrote Thus, according to Beard, the constitutional convention in We the People, which debunked Beard completely. “No correlation” Philadelphia in 1787 was promoted by “a small and active group of men exists, McDonald discovered, “between their economic interests and immediately interested through their personal possessions in the their votes on issues in general or on key economic issues.” In fact, outcome of their labors. . . . The propertyless masses were . . . excluded McDonald emphasized that in Pennsylvani a, South Carolina, and New at the outset from participation. . . .” York “most [public] security holders opposed ratification.” Beard, who was among the first generation of professionally trained How could Beard have erred so badly? In part Beard missed the historians, gathered evidence on the Founders: “Many leaders in the mark because he was trying to hit something else—a Progressive movement for ratification were large [public] security holders,” he agenda for reform, the excuse to transfer wealth from the haves to the argued. Those who opposed the Constitution owned few er public have-nots. If the Founders were merely protecting their economic securities. interests, Beard and his progressive friends were justified in supporting the redistribution of wealth. Each state had to vote on ratifying the Constitution, and Beard offered evidence that “the leaders who supported the Constitution in How can we be sure that Beard was blinded by his ideology? One the ratifying conventions represented the same economic groups as the indication is that he seems to have willfully distorted his evidence to members of the Philadelphia convention.” The Founders, Beard suggest that certain signers of the Constitution owned more public conceded, did not write the Co nstit u tion merely to make money, but securities (and other forms of wealth) than they actually did. For nonetheless, “The Constitution was essentially an economic document.” example, Daniel Jenifer of Maryland, who signed the Constitution in Philadelphia, held no public securities—a point against Beard’s view Beard’s thesis, seemingly well researched, was presented in a that the signers were self-interested. But Beard classified Jenifer among tentative way, but it soon swept the historical profession and became the large security holders because his son Daniel Jenifer, Jr., held several gospel in college classrooms by the 1920s. The Constitution, professors thousand dollars’ worth of them. suggested to their students, was not a document worthy of special respect. It was a product of self-interest that should be interpreted But alas, as McDonald shows, “Jenifer had no children—at least no loosely and changed as the Progressives saw fit. legitimate ones—for in both of the sources Beard used to gather data on Jenifer, it is expressly stated that Jenifer was a bachelor.” Beard also The constitutional separation of powers, for example, according to classified Gunning Bedford, Jr., a delegate from Delaware, as a security Woodrow Wilson—a friend of Beard’s and a fellow Ph.D. in history— holder, but, as Beard admits, there were two Gunning Bedfords in was a “grievous mistake” by the Founders. More centralization of power Delaware, and the one who didn’t sign the Constitution was the one was needed—especially in the executive branch—to change society who owned the public securities. Furthermore, Beard places delegates through needed reforms, such as the progressive income tax. Nicholas Gilman, William Samuel Johnson, Charles Pinckney, and others Beard made his reputation with his book and went on to an as holders of public securities, but they di d not a c quire these securities illustrious career: He authored or coauthored 49 books that had sold until long after they signed the Constitution. more than 11 million copies by 1952. Some of Beard’s mistakes are more subtle. He classifies delegate William Few as a security holder because Few funded a “certificate of 1779” with a “nominal” value of $2,170. True, but what Beard neglects Questionable Scholarship During the 1950s, historian Forrest McDonald did a more thorough study of the Founders and discovered what can most generously be 10 A Republic—If We Can Keep It to say is that Few’s “nominal” value was scaled down to a mere $114.80, a sum hardly worth motivating Few to sign the Constitution to redeem. 3 No doubt all the Founders were concerned about their own finances as well as those of the nation. But in writing the Constitution, they were above all trying to apply principles of natural rights and limited government to create a durable nation that would be a bastion of freedom in an unfree world. James Madison and other Founders diligently studied ancient and modern republics to learn from their mistakes what safeguards to employ to protect liberty while allowing elected politicians enough authority to effectively lead the nation.

The Sacrifices Made What Beard omits from his history is the wisdom and dedication of the Founders in overcoming narrow self-interest to produce a masterful guiding document for the country. The actions of Robert Morris of Chapter Three Pennsylvania and Nathaniel Gorham of Massachusetts, for example, are remarkable. Both men signed the Constitution and supported it vig- Madison’s Veto Sets a Precedent orously even though they ultimately lost money doing so. Both men had committed to buy land with public securities—which Today, when a president looks at a spending bill that has passed were trading at only about 15 percent of par value before the Congress, he typically asks, “How will this help my party gain votes?” Constitution was ratified. When the Constitution was ratified and the and “What interest groups will this bring to my side?” Sometimes, when public securities were redeemed, both Morris and Gorham had to buy modern presidents are more philosophical, they ask, “Will this spending the securities at par value, so they both lost fortunes. Morris, in fact, help the economy, or advance the nation’s interests?” went from being the wealthiest merchant in the United States in 1787 to Our first presidents approached spending bills very differently. The being tossed into debtors’ prison in the 1790s. Contrary to Beard, first question they usually asked was, “Is this spending constitutional?” Morris had voted against his own economic self-interest, and for his Only if the a nswe r was yes would they then ask if it was wise, if i t would country’s financial integrity. benefit the nation, or if it would gain votes. —BWF, July 2009 These early presidents viewed the Constitution as a binding document that separated the powers of government for a purpose. Only if power were decentralized, they argued, could tyranny, high taxes, and government oppression be avoided. Thus Article 1, Section 8, of the Constit u tion restricted the power of Congress to spend taxpayer dollars to a limited number of items, mainly national defense. An example of how early presidents adhered to the Constitution— even when it would have been politically expedient to do otherwise—is the issue of federal aid for internal improvements, the building and improving of roads, canals, and waterways in our new nation. The 11 12 A Republic—If We Can Keep It Madison’s Veto Sets a Precedent 13

Constitution does not grant Congress the right to appropriate funds for laws of the several States in all cases not specifically exempted to be roads and canals. The Founders did recognize that improving our superseded by laws of Congress.” highways was essential for economic development, but they believed These words from Madison carry exceptional weight because he that states or private companies should do the work; neither good was a chief architect of the U.S. Constitution. At the convention in government nor just results occurred when the people in Georgia could Philadelphia in 1787, Madison sat in front of the presiding officer. He be taxed to build a canal in New York. never missed an important speech, and he took copious notes on the The problem, of course, is that congressmen in New York had proceedings. When he says that the General Welfare clause cannot be incentives to argue that federal funds could be used profitably and in used to give Congress “a general power of legislation instead of the the national interest to build the Erie Canal. Since votes in the large defined and limited one,” he is echoing the original intent of the state of New York were pivotal in many presidential elections, our early Founders. presidents had to decide whether to chase votes or follow the Even so, Madison’s veto may have surprised Congress because Constitution. Sometimes our presidents failed the test. For example, earlier he had conceded that “establishing throughout our country the President Thomas Jefferson supported the construction of the roads and canals . . . can best be executed under the national authority. inefficient National Road from Maryland to Illinois. No objects within the circle of political economy so richly repay the James Madison, who followed Jefferson as president, seems to have expense bestowed upon them.” Madison believed, however, that the supported the National Road, but he learned from the experience. He country was better off following the Constitution rather than twisting directly confronted the issue of federal aid to internal improvements in its meaning to secure more rapid economic growth. If we want federal his next-to-last day as president. Congress had passed what was labeled road-building, then pass a constitutional amendment to permit it. the Bonus Bill of 1817, which would have used federal funds to build Madison’s principled veto of the Bonus Bill of 1817 set a precedent roads and canals across the nation. Madison responded with a that lasted for generations. The Erie Canal, for example, never received thundering veto. “I am constrained,” he said, “by the insuperable federal funds. In 1830, however, Congress tested the resolve of difficulty I feel in reconciling the bill with the Constitution.” President Andrew Jackson with the Maysville Road Bil,l which would Madison admitted the bill would probably help his country, but then have used federal funds to build a turnpike in Kentucky. he observed that “such a power is not expressly given by the Jackson scrupulously followed Madison’s lead and vetoed the bill. Constitution . . . and can not be deduced from any part of it without an Sure, the proposed turnpike might be economically sound, Jackson inadmissible latitude of construction and a reliance on insufficient conceded, but if the country used federal funds to build a turnpike in precedents.” Kentucky, “there can be no local interest that may not with equal The promoters of the bill in Congress had argued that building propriety be denominated national.” He echoed Madison by adding, “A roads and improving rivers at federal expense would “render more easy disregard of this distinction would of necessity lead to the subversion of and less expensive the means and provisions for the common defense.” the federal system.” Madison retorted: “To refer the power in question to the clause ‘to Madison and Jackson were also following George Washington’s provide for the common defense and general welfare would be contrary advice in his Farewell Address. “[Avoid] the accumulation of debt,” to the established and consistent rules of interpretation.” He added: Washington admonished, “not only by shunning occasions of expense, “Such a view of the Constitution would have the effect of giving to but by vigorous exertions in time of peace to discharge the debts which Congress a general power of legislation instead of the defined and unavoidable wars have occasioned, not ungenerously throwing upon limited one hitherto understood to belong to them, the terms ‘common posterity the burthen which we ourselves ought to bear.” defense and general welfare’ embracing every object and act within the purview of a legislative trust.” Madison concluded that twisting the General Welfare clause in this way “would have the effect of subjecting both the Constitution and the 14 A Republic—If We Can Keep It

Debt Retired During Jackson’s presidency the United States fulfilled Washington’s 4 request and retired all its national debt. In large part, Jackson argued, the new annual surpluses reflected the frugality exemplified by refusing to use federal funds for internal improvements. The government had raised a small amount of revenue each year through tariffs, the sale of land, and excise taxes, especially on whiskey. But the nation had followed the Constitution and limited spending mainly to national defense—two wars with Britain and occasional Indian removal. In Jackson’s veto of the Maysville Road, he observed that on “the national debt we may look with confidence to its entire extinguishment in the short period of four years.” We were a nation “free from debt and with all her immense resources unfettered! What a salutary influence would not such an exhibition [of restraint] exercise upon the cause of liberal principles and free government throughout the world!” Chapter Four James Madison, who lived to see the national debt removed, could point to his veto of the Bonus Bill as crucial in this achievement. Principled Parties —BWF, January 2008

Imagine a political movement that says it’s committed to “equal rights”—and means it. Not just equality in a few cherry-picked rights but all human rights, including the most maligned, property rights. Imagine a movement whose raison d’être is to oppose any and all special privileges from government for anybody. When it comes to political parties, most of them in recent American history like to at least say they’re for equal rights. If we’ve learned anything from politics, though, surely the first lesson is this: What the major parties say and do are two different things. In American history no such group has ever been as colorful and as thorough in its understanding of equal rights as one that flashed briefly across the political skies in the 1830s and ’40s. They were called “Locofocos.” If I had been around back then, I would have proudly joined their illustrious ranks. The Locofocos were a faction of the Democratic Party of President Andrew Jackson, concentrated mostly in the Northeast and New York in particular, but with notoriety and influence well beyond the region.

15 16 A Republic—If We Can Keep It Madison’s Veto Sets a Precedent 17

Formally called the “Equal Rights Party,” they derived their better The rightful power of all legislation is to declare and enforce only known sobriquet from a peculiar event on October 29, 1835. our natural rights and duties, and to take none of them from us. No man has a natural right to commit aggression on the equal rights of another; and this is all the law should enforce on him. Turn On The Lights, The Party’s Starting The idea is quite unfounded that on entering into society, we give up Democrats in New York City were scrapping over how far to extend any natural right. Jackson’s war against the federally chartered national bank at a convention controlled by the city’s dominant political machine, The convention pronounced “Hostility to any and all monopolies by Tammany Hall. (He had killed the bank in 1832 by vetoing its renewal.) legislation,” “unqualified and uncompromising hostility to paper money When the more conservative officialdom of the convention expelled the as a circulating medium, because gold and silver are the only safe and radical William Leggett, editor of the Evening Post, they faced a full-scale constitutional currency,” and “Hostility to the dangerous and revolt by a sizable and boisterous rump. The conservatives walked out, unconstitutional creation of vested rights by legislation.” plunging the meeting room into darkness as they left by turning off the These days Congress and the legislatures of our 50 states routinely gas lights. The radicals co ntinued to meet by the light of candles they lit bestow advantages on this or that group at the expense of those whom with matches called “loco focos” (Spanish for “crazy lights”). the same laws disadvantage—from affirmative action to business With the Tammany conservatives gone and the room once again subsidies. The Locofoco condemnation of such special privilege couldn’t illuminated, the Locofocos passed a plethora of resolutions. They be clearer: “We ask that our legislators will legislate for the whole condemned the national bank as an unconstitutional tool of special people and not for favored portions of our fellow-citizens, thereby interests and an engine of paper-money inflation. They assailed all creating distinct aristocratic little communities within the great monopolies, by which they meant firms that received some sort of community. It is by such partial and unjust legislation that the privilege or immunity granted by state or federal governments. They productive classes of society are . . . not equally protected and respected endorsed a “strict construction” of the Constitution and demanded an as the other classes of mankind.” end to all laws “which directly or indirectly infringe the free exercise of William Leggett, the man whose expulsion from the October equal rights.” They saw themselves as the true heirs of Jefferson, gathering by the regular Democrats of Tammany Hall sparked the unabashed advocates of laissez faire and of minimal government Locofocos into being, was the intellectual linchpin of the whole confined to securing equal rights for all and dispensing special movement. After a short stint editing a literary magazine called The privileges for none. Critic, he was hired as assistant to famed poet and editor William Cullen Three months later, in January 1836, the Locofocos held a Bryant at the New York Evening Post in 1829. Declaring “no taste” for convention to devise a platform and endorse candidates to run against politics at first, he quickly became enamored of Bryant’s philosophy of the Tammany machine for city office in April. They still considered liberty. He emerged as an eloquent agitator in the pages of the Post, themselves Democrats, hoping to steer the party of Jefferson and especially in 1834 when he took full charge of its editorial pages while Jackson to a radical reaffirmation of its principled roots rather than bolt Bryant vacationed in Europe. He struck a chord with the politically and form a distinct opposition party. “We utterly disclaim any intention unconnected and with many working men and women hit hard by the or design of instituting any new party, but declare ourselves the original inflation of the national bank. Democratic party,” they announced. In the state of New York at the time, profit-making corporations The “Declaration of Principles” the Locofocos passed at that January could not come into being except by special dispensation from the gathering is a stirring appeal to the bedrock concept of rights, as legislature. This meant, as historian Richard Hofstadter explained in a evidenced by these excerpts: 1943 article, that “men whose capital or influence was too small to win charters from the lawmakers were barred from such profitable lines of The true foundation of Republican Government is the equal rights of every citizen, in his person and property, and in their management. 18 A Republic—If We Can Keep It corporate enterprise as bridges, railroads, turnpikes and ferries, as well as banks.” 5 Leggett railed against such privilege: “The bargaining and trucking away of chartered privileges is the whole business of our lawmakers.” His remedy was “a fair field and no favor,” free market competition unfettered by favor-granting politicians. He and his Locofoco followers were not antiwealth or antibank, but they were vociferously opposed to any unequal application of the law. To Leggett and the Locofocos, the goddess of justice really was blindfolded! The Locofocos won some local elections in the late 1830s and exerted enough influence to see many of their ideas embraced by no less than Martin Van Buren when he ran successfully for president in 1836. By the middle of Van Buren’s single term, the Locofoco notions of equal rights and an evenhanded policy of a small federal government were reestablished as core Democratic Party principles. There they Chapter Five would persist through the last great Democratic president, Grover Cleveland, in the 1880s and 1890s. Sadly, those essentially libertarian roots have long since been abandoned by the party of Jefferson and Andrew Johnson and the Constitution Jackson. If you’re unhappy that today’s political parties give lip service to Before 1998 “Andrew Johnson” used to be the answer to the equal rights as they busy themselves carving yours up and passing out question “Who was the only U.S. president to be impeached?” But Andrew Johnson, the self-educated tailor, deserves to be remembered the pieces, don’t blame me. I’m a Locofoco. more for his ideas, especially his defense of the Constitution in a —LWR, January 2010 troubled time. Johnson was born in poverty in North Carolina in 1808 and moved to Greenville, Tennessee, as a teenager when he heard the town needed a tailor. He established a strong business there and at age 26 won election to the state legislature, where he spent several terms. He strongly supported fellow Tennessean Andrew Jackson (president 1829–1837), and eventually won election to the U.S. House and Senate. In Congress, Johnson became a constitutional watchdog on federal spending and special subsidies to favored groups. The protective tariff he called “a system of humbug,” and he wanted entrepreneurs, not the federal government, to build the nation’s canals and railroads. He often tried to get a law passed for across-the-board pay cuts for federal employees, whom he resented because they lived comfortably in Washington from the tax dollars of hard-working artisans, farmers, and laborers.

19 20 A Republic—If We Can Keep It Andrew Johnson and the Constitution 21

Charity, Johnson argued, begins with people, not government. This Johnson said, “it was eminently proper that we should provide for those issue came up when he ran for governor of Tennessee in 1853. Gustavus who were passing suddenly from a condition of bondage to a state of Henry, the Whig candidate, attacked Johnson vigorously in a public freedom. But this bill proposes to make the Freedmen’s Bureau . . . a debate for voting against a bill to give federal aid to Ireland. The severe permanent branch of the public administration, with its powers greatly potato famine, Henry insisted, called for American help. Johnson enlarged.” These powers “in my opinion are not warranted by the responded that people, not government, had the responsibility of Constitution.” helping their fellow men in need. Any politician could be generous with Johnson built his case around the provisions in the bill that put the other people’s money, which was forcibly collected in taxes. He then government in the business of establishing schools for blacks and of took from his pocket a receipt for the $50 he had sent to the hungry taking land from plantation owners to give to former slaves without due Irish. “How much did you give, sir?” he challenged Henry, who had given process of law. On the first point, Johnson noted that Congress “has nothing. The audience, according to the Memphis Appeal, gave Johnson never founded schools for any class of our own people, not even for the “prolonged and deafening applause.” Such adherence to the orphans of those who have fallen in the defense of the Union, but has Constitution, Johnson believed, helped him narrowly win the governor’s left the care of education to the much more competent and efficient chair that year. control of the States, of communities, of private associations, and of When the Civil War began, Governor Johnson left Tennessee rather individuals.” than break with the union. That loyalty endeared him to President The president hoped that blacks would be protected in their civil Lincoln, who asked the Democrat Johnson to be his vice-presidential liberties and would thereby use their freedom to gain skills and work candidate in the 1864 election. The Lincoln-Johnson campaign won, and their way up in society. “The idea on which the slaves were assisted to when Lincoln was assassinated Johnson became president for four freedom was that on becoming free they would be a self-sustaining turbulent years. population.” He added that “any legislation that shall imply that they are As president, Johnson was not a consistent devotee of liberty. He not expected to attain a self-sustaining condition must have a tendency believed that blacks were not as capable as whites, and he was reluctant injurious alike to their character and their prospects.” to give blacks full voting rights. But when the Thirteenth Amendment Granted, Johnson was overly optimistic that his southern brethren (abolishing slavery) became law, Johnson, as a strict constitutionalist, would allow blacks sufficient civil liberties to compete for jobs and “fully recognized the obligation to protect and defend that class of our establish fair contracts. But, as in the earlier case of charity to the Irish, people whenever and wherever it shall become necessary, and to the he believed that compassionate people, not a government program, full extent compatible with the Constitution of the United States.” were the solution to the problem. They would build the schools and train the newly freed slaves. He was ever faithful to the Constitution Vetoes Bill when he said that establishing schools was a state, not a federal, function and that t he federal government should not f avor “o n e class or Johnson found himself caught in the middle. On one hand were color of our people more than another.” southern racists, who passed Black Codes that denied basic civil liberties to former slaves. On the other were Radical Republicans who Interestingly, Johnson’s vision of self-help for blacks somewhat not only wanted full voting rights for blacks, but sometimes special paralleled that of black leader Booker T. Washington, who agreed that privileges as well. For example, Republicans had set up the Freedmen’s caring people, not bureaucrats at the Freedmen’s Bureau, needed to Bureau during the war to help freed blacks get food, clothing, and other take the lead in promoting black education. In the spirit of Johnson’s necessities of life. After the war, the Freedmen’s Bureau expanded its veto of the Freedmen’s Bureau, Washington set up Tuskegee Institute, efforts to help blacks get land and education as well. In 1866 Congress with help from whites, as a black-operated college. Blacks and whites voted to extend the life of the Freedmen’s Bureau and expand its scope. also worked together to set up Fisk College and Meharry Medical Johnson, however, vetoed the bill. In a nutshell, his view was this: Civil liberties for blacks, yes; special legislation, no. “In time of war,” 22 A Republic—If We Can Keep It

College in Nashville. In fact, dozens of private black colleges were established in the years immediately after emancipation. Black literacy skyrocketed from 20 percent in 1870 to 83 percent in 1930, a period 6 marred by forced segregation. That increased literacy was the tool that blacks used to win their s truggle to ha ve their ri g hts recognized in the coming decades. Andrew Johnson’s arguments are still cogent today. The Constitution does not guarantee special privileges for any class of citizens. —BWF, September 2003

Chapter Six

A Supreme Court to Be Proud Of

In the closing months of the current U.S. Supreme Court session, pundits of every stripe will be assessing the impact of recent changes in the Court’s composition. If the justices themselves are interested in how they measure up, there may be no better standard than the Court’s record under Chief Justice Melville W. Fuller. It’s a sad commentary that in the mainstream media, courts are tagged with such confusing and superficial labels as “conservative” or “liberal”—terms loaded with political baggage and often manipulated by those with an ax to grind. I prefer more clarifying questions: Does a court interpret law or manufacture it? Does it apply the Constitution according to what its text says or is it willing to abandon it to accommodate current whims, trendy ideologies, or alleged “needs” of the moment? Were our liberties more or less secure after it did its work? The Fuller Court, encompassing a parade of justices who came and went during Fuller’s 22 years as chief, was not consistent on all counts. But unlike any subsequent Court, it stretched neither the law nor the Constitution beyond what the words say. When it found law to be in conflict with the Constitution, it usually sided with the latter because

23 24 A Republic—If We Can Keep It A Supreme Court to Be Proud Of 25 liberty under the rule of law was its highest priority. It upheld the Fuller, 55, who had argued many cases before the Supreme Court importance of a limited federal role, strengthened the role of the states over a 16-year period, was precisely what Cleveland was looking for. in our federal system, and defended contract and property rights The President admired the fact that in his visits and meetings with against a rising tide of egalitarian agitation. Fuller, the Illinois lawyer had never asked him for anything, even Melville Weston Fuller was born in Augusta, Maine, in 1833. Both turning down three high posts within the administration. And he had sides of his family were staunch Jacksonian Democrats—hard money taken considerable public heat in defending the President’s hard money and a small federal government being foremost among the principles stance and his numerous vetoes of spending bills. To thwart a possible they embraced. After graduation from Bowdoin College in 1853, Fuller decline by Fuller, Cleveland announced his nomination before Fuller was admitted to the bar in 1855. A year later he started a successful law even gave his consent. He was literally dragged into an office for which practic e in Illinois,where he would reside until his elevatio n to t h e he didn’t lust but in which he quickly distinguished himself as one of its Supreme Court by President Grover Cleveland in 1888. most able and important holders. As a one-term Democratic legislator in Illinois’s lower house in Fuller charmed his colleagues on the Court with his good humor, 1862, Fuller condemned the Lincoln administration’s arbitrary arrests, thoughtful scholarship, and remarkable capacity for friendly persuasion suspension of habeas corpus, and other wartime indiscretions as and mediation. He began a custom still in use today of requiring each assaults on liberties guaranteed by the Constitution. He opposed both justice a t the st a rt of a workin g da y to shake the hand of every other secession and slavery, but didn’t believe in quashing dissent and due justice. He resolved the C ourt’s crowded docket. process to vanquish them. As a Democratic activist and adviser to The Fuller Court should be most admired, however, for its candidates for national office, he opposed protectionism as special- jurisprudence. Certainly Americans who share the Founders’ vision can interest legislation that hurt consumers. He decried irredeemable paper find much about it to applaud. Fuller himself was at the center of it, money as a form of theft and fraud, even voting to forbid the Illinois often arguing for the majority. When freedom of commerce was at issue, treasury from receiving greenbacks as payment for state taxes. He the Fuller Court did not carelessly allow governmental interference. For scrutinized public spending for waste and favoritism, once earning the example: Prohibitionists in Iowa secured passage of a law forbidding wrath of his colleagues by publicly opposing (unsuccessfully) a bill to the sale of an interstate shipment of liquor, but the Court, with Fuller give gold pens to each member of the Illinois House. himself writing the majority opinion, declared it an unconstitutional In what biographer Willard L. King terms “the greatest public violation of the Commerce Clause. speech of his career,” Fuller seconded the 1876 nomination of Indiana’s Thomas Hendricks for president in unmistakably Jeffersonian terms: Restricted Sherman Act “[T]he country demands a return to the principles and practices of the fathers of the Republic in this the hundredth year of its existence, and In other commerce-related rulings, the Fuller Court restricted the the restoration of a wise and frugal government, that shall leave to application of the almost incoherently broad language of the Sherman every man the freest pursuit of his avocation or his pleasures, Anti-Trust Act. Regulating the terms of interstate commerce and consistent with the rights of his neighbors, and shall not take from the transportation, as the Constitution provided for, was one thing, but mouth of labor the bread it has earned.” federal meddling in manufacturing and production was quite anathema to Fuller and most of his colleagues. It was left to later Courts to distort The 1876 Democratic Convention nominated Samuel Tilden instead the Commerce Clause and justify federal regul ation of virtually every of Hendricks, but many Democrats around the country remembered corner of the economy. Melville Fuller. One of them was Grover Cleveland. The last Jacksonian Democrat to hold the highest office, Cleveland wanted a chief justice The Fuller Court staunchly defended the sanctity of contract by with an unblemished record of integrity who not only shared his treating it, in the words of James W. Ely, Jr., a Vanderbilt University law limited-government philosophy but was also a good business manager professor and biographer of the Court, “as the controlling constitutional who could fix the three-year backlog of cases at the high court. 26 A Republic—If We Can Keep It norm.” It resisted attempts at congressional price- and rate-fixing. It once unanimously threw out a Louisiana law that prohibited a person from obtaining insurance from a company that was not qualified to do 7 business in that state. Its feelings in this regard were summed up in another ruling in which the majority declared that “The legislature may not, under the guise of protecting the public interest, arbitrarily interfere with private business, or impose unusual and unnecessary restrictions upon lawful occupations.” Likewise, the Court was far friendlier to property rights in eminent-domain cases than the recent Supreme Courts. One of the finest moments of the Fuller Court was its rejection in 1895 of a federal income tax passed the previous year. Pleas that Congress needed the money, class warfare, and egalitarian claims against other people’s wealth carried little weight with this Court. The Constitution forbade direct taxation of that kind, and that was enough to ditch it. Melville Weston Fuller never succumbed to the temptations Chapter Seven of power and ego or discovered vast new constitutional duties for the Washington establishment to inflict on the people. He and most of his Two Presidents, Two Philosophies, and Two Different colleagues actually took seriously their oath to defend the supreme law Outcomes of the land, a notion that seems sadly quaint in an age where sweeping judicial activism is a mainstream law-school principle. Richard Weaver’s observation that “ideas have consequences” is —LWR, March 2006 especially valid when we study the growth of government in America. If we compare the attitudes of Woodrow Wilson and Calvin Coolidge on the Constitution and the Declaration of Independence we can see how their views on government intervention were a logical outcome of their conceptions of these documents. The Declaration of Independence reflected a generation of thinking on the subject of natural rights—“that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty, and the pursuit of happiness.” The Constitution later separated the powers of government to protect life, liberty, and property from future encroachments by potential tyrants. Woodrow Wilson had only limited use for the Founders and the Declaration. “If you want to understand the real Declaration of Independence,” Wilson urged, “do not read the preface.” Government did not exist merely to protect rights. Instead, Wilson argued that the Declaration “expressly leaves to each generation of men the determination of what they will do with their lives. . . . In brief, political

27 28 A Republic—If We Can Keep It Two Presidents, Two Philosophies, and Two Different Outcomes 29 liberty is the right of those who are governed to adjust the government 4 majority, but Justice William Day was appalled at the constitutional to their own needs and interests.” “We are not,” Wilson insisted, “bound violations in the bill. “Such legislation, it seems to me,” Day said, to adhere to the doctrines held by the signers of the Declaration of “amounts to the taking of the property of one and giving it to another in Independence.” violation of the spirit of fair play and equal right which the Constitution The limited government enshrined in both the Declaration and the intended to secure in the due process clause to all coming within its Constitution may have been an advance for the Founders, Wilson protection.” conceded, but society had evolved since then. The modern state of the Such growth of government came with a cost, but Wilson was ready early 1900s was “beneficent” and “indispensable.” Separation of powers with the progressive income tax to pay for his new programs. World hindered modern governments from promoting prog ress. “[T]he o nly War I clearly influenced Wilson’s use of the tax and his centralization of fruit of dividing power,” Wilson asserted, “was to make it irresponsible.” power—he promoted an increase in the top tax rate from 7 to 15 A better “constitutional government,” Wilson urged, was one percent in 1916; then, during t he war, Wilson secured an increase to a “whose powers have been adapted to the interests of its people.” A 77 percent marginal rate on the country’s largest incomes. strong executive was needed, he believed, to translate the interests of Where Wilson supported an evolving Constitution that gave him the people into public policy. The president was the opinion leader, the authority to increase the power of government and centralize power, “spokesman for the real sentiment and purpose of the country.” And President Calvin Coolidge, who was on the ticket that succeeded Wilson, what the country needed was “a man who will be and who will seem to believed that the Declaration and the Constitution should be accepted the country in some sort of an embodiment of the character and as the Founders wrote them. purpose it wishes its government t o have— a man who under stood his In July 1926, on the sesquicentennial of the signing of the own day and the needs of his country.” Declaration, Coolidge gave a speech reaffirming the need for limited In the White House, Wilson intended to be a strong president government. “It is not so much then for the purpose of undertaking to working with a “living Constitution.” He promoted the expanding of proclaim new theories and principles that this annual celebration is “beneficent” government into new areas. In his second year as president maintained, but rather to reaffirm and reestablish those old theories he concluded that shipping rates were too high, and he blessed his and principles which time and the unerring logic of events have secretary of treasury’s plan to regulate overseas shipping rates and the demonstrated to be sound.” companies doing the shipping. Later he promoted a plan to make loans Coolidge added that “there is a finality” about the Declaration. “If all to farmers at federally subsidized rates. Then he pushed through men are created equal, that is final. If they are endowed with inalienable Congress a bill fixing an eight-hour day for railroad workers. rights, that is final. If governments derive their just powers from the Article 1, Section 8, of the Constitution gives no power to the federal consent of the governed, that is final. No advance, no progress can be government to regulate the prices of trade, the hours of work, or to made beyond these propositions. If anyone wishes to deny their truth make special loans to farmers or any other group. But Wilson said he or their soundness, the only direction in which he can proceed was operating with a “living Constitution” and that increased historically is not forward, but backward toward the time when there government in these cases reflected appropriately the greater will of was no equality, no rights of the individual, no rule of the people. Those the people. Likewise, when Wilson helped centralize banking with the who wish to proceed in that direction can not lay claim to progress. Federal Reserve system and when he further restricted trade by They are reactionary.” promoting the Clayton Antitrust Act, he believed that this work for the Coolidge’s attitude as president reflected his belief in the ideas of general good outweighed any loyalties to the rigid construction set up the Declaration. He was not always consistent—for example, he signed by the Founders in the original Constitution. the Fordney-McCumber Tariff in 1922, which slapped high and uneven Not all Americans agreed with Wilson ‘s evolving Constitution. The taxes on some needed imports. But his efforts were largely in the Adamson Act, which required the eight-hour day for railroad workers, was challenged and went to the Supreme Court. It was sustained by a 5– 30 A Republic—If We Can Keep It direction of reducing the size of government to increase liberty. For example, Coolidge cut the size of government and was the last president to have budget surpluses every year of his presidency. Also, when the 8 Harding-Coolidge administration came into office in 1921, the tax rate on top incomes was 73 percent; when Coolidge left the presidency eight years later it was 25 percent. The rates on the lowest incomes were also slashed.

Attacked Special Interests Furthermore, Coolidge often attacked special interests. He vetoed a bill to give a special cash bonus to veterans; and, through President Harding, he was part of the administration that shut down a government-oeraed p t steel plant set up by Wison,l which had lost money each year of its operation. Not once but twice Coolidge courageously vetoed the McNary- Chapter Eight Haugen farm bill, which was popular with farmers because it promised federal price supports for them. “I do not believe,” Coolidge wrote, “that Andrew Mellon: The Entrepreneur as Politician upon serious consideration the farmers of America would tolerate the precedent of a body of men chosen solely by one industry who, acting in Rarely do spectacular entrepreneurs leave their realm of business the name of the government, shall arrange for contracts which for the political arena. One exception is Andrew Mellon, the third- determine prices, secure the buying and selling of commodities, the wealthiest American of his era, who left a dazzling career in American levying of taxes on that ind ustry, and pay losses on foreign dumping of industry to become secretary of treasury under Presidents Warren any surplus.” Harding, Calvin Coolidge, and Herbert Hoover. When presidents are faithful to America ‘s founding documents, Mellon established his career in Pittsburgh as a successful banker— limited government has a chance to flourish. But when presidents always on the lookout for profitable innovations to back. His emote over a “living” Declaration and Constitution, then the growth of investments in Gulf Oil challenged the legendary John D. Rockefeller, government is upon us. and Mellon’s establishment of A lcoa introdu ced lightweight a luminum —BWF, June 2007 as a significant industrial metal. Should Mellon have given up running these and other profitable ventures in 1921 to work under President Harding, a career politician who had little understanding of economics? Mellon hesitated. But when Harding persisted, Mellon joined the president’s cabinet. At age 65, Mellon had experienced a full career in business; his country, which was in ec onomic chaos after World War I, had 11.7 percent unemployment and needed his financial guidance.

31 32 A Republic—If We Can Keep It Andrew Mellon: The Entrepreneur as Politician 33

Confronting Crises taxes by exploiting tax loopholes—foreign investments, the buying and As treasury secretary Mellon confronted three major crises: a selling of art and coins, and the purchase of tax-exempt bonds. spiraling national debt, near confiscatory tax rates, and the repayment Why not, Mellon argued, cut the top rate from 73 to 25 percent? In of large loans owed the United States by most European nations. fact, why not chop all rates by the same proportion? That idea—which The soaring national debt required immediate attention. During the would be called the Mellon Plan—would not only encourage the rich to 140 years from the American Revolution to 1916, the United States had invest in the American economy, it might actually generate more accumulated a national debt just over $1.2 billion. But during World revenue. “It seems difficult for some to understand,” he wrote, “that War I the debt had skyrocketed to more than $24 billion. The annual high rates of taxation do not necessarily mean large revenue to the interest payments alone exceeded the entire national debt before the Government, and th at more revenue may often be obtained by lower war. rates.” The U.S. tax system, which generated the revenue to pay the debt, Coolidge fully backed the Mellon Plan, and Congress passed it in was in disarray. Under President Woodrow Wilson, Harding’s stages during the 1920s. Cutting both federal spending and tax rates predecessor, the income tax had become part of American life. Wilson across the board worked wonders for the American economy. American started with a top marginal rate of 7 percent, but he argued that the war businessmen plowed capital into radios, cars, refrigerators, vacuum required a drastic rise in taxes. Congress agreed, and by 1920, Wilson’s cleaners, telephones, and a variety of new inventions from the air last full year in office, the top rate reached 73 percent. Tax avoidance conditioner to the zipper. Entrepreneurs knew they would be able to was rampant, and the annual revenue did not offset expenses. keep most of what they invested, and the American economy grew rapidly during the 1920s. Finally, the debts that the European allies owed the United States for food a nd materials dur ing the war were over $10 billion. Britain and France, which owed the most, were balking at repayment. Measuring Misery Few secretaries of the treasury have ever encountered such One measure of prosperity is the misery index, which combines formidable problems, and Harding (who died in 1923) and Coolidge unemployment and inflation. During Coolidge’s six years as president, relied on Mellon for financial advice. Mellon’s attack on the debt was his misery index was 4.3 percent—the lowest of any president during twofold. First, he renegotiated almost one-third of the debt at lower the twentieth century. Unemployment, which had stood at 11.7 percent interest rates; second, he helped chop federal spending from $6.5 billion in 1921, was slashed to 3.3 percent from 1923 to 1929. What’s more, in 1921 to $3.5 billion in 1926. Coolidge, in particular, obliged by Mellon was correct on the effects of the tax-rate cuts—revenue from vetoing special-interest legislation—a bill to give a bonus to veterans income taxes steadily increased from $719 million in 1921 to over $1 and another to subsidize wheat and cotton farmers. billion by 1929. Finally, the United States had budget surpluses every Mellon was not always consistent in his free-market arguments. He year of Coolidge’s presidency, which cut about one-fourth of the supported high tariffs for many products, but he recognized that a national debt. “subsidy can be paid only by taking money out of the pockets of all the On the issue of the Allied loans, Mellon was less successful. When people in order that it shall find its way back into the pockets of some of the Europeans refused to begin payments on their debts, Mellon sub- the people.” stantially lowered the interest rates on the loans and gave the Mellon, meanwhile, did his part to promote thrift. He cut staff at the Europeans 62 years to repay. At first, they agreed, and even began Treasury Department, and he reduced the size of America’s paper making small payments, but only Finland paid off its entire debt. The money; the smaller bills were more durable and saved ink and paper. other countries eventually asked for a moratorium on payments, and then abandoned their debts entirely. The slashing of the tax rates, however, was where Mellon did his most good. He carefully studied the effects of confiscatory rates and concluded that most wealthy Americans were avoiding payment of 34 A Republic—If We Can Keep It

Oddly, the Allies had one good argument for reneging on their debts. In 1930, when the United States passed the Smoot-Hawley Tariff, the highest in American history, Europeans asked how they could repay their loans when the United States was refusing to accept their imports? Part II Hoover ultimately appointed Mellon as ambassador to England—in part to nudge the British into honoring their debt commitment—but with the Great Depression under way, even Mellon’s powers of persuasion failed to move the British.

By 1933, with the arrival of Franklin Roosevelt and the New

Dealers, the times had changed for Mellon. Hoover had raised the top marginal income tax rate to 63 percent, and Roosevelt hiked it to 79 percent in 1935. Moreover, Roosevelt played politics and pressured the IRS to assess Mellon a $3 million fine for tax evasion. Mellon gladly went to court and was vindicated of all charges of wrongdoing. David Blair, the former commissioner of internal revenue, called the tax The Trials of Unlimited investigatio n “unwarranted abuse by high officials of the government.” Government Mellon, despite the trumped-up charges, always focused optimistically on the art of the possible. Before his death in 1937 he donated his superb art collection to the United States. In doing so, he wanted to avoid all federal expense, so he built the National Gallery of Art in Washington, D. C., to house the paintings and then donated all of it to his country. When Mellon went to Washington, he changed it more than it changed him. —BWF, December 2008

Chapter Nine

Where Are the Omelets?

“On ne saurait faire une omelette sans casser des oeufs.” [“One can’t expect to make an omelet without breaking eggs.”] With those words in 1790, Maximilian Robespierre welcomed the horrific French Revolution that had begun the year before. A consummate statist who worked tirelessly to plan the lives of others, he would become the architect of the Revolution’s bloodiest phase—the Reign of Terror of 1793–94. Robespierre and his guillotine broke eggs by the thousands in a vain effort to impose a utopian society based on the seductive slogan “liberté, égalité, fraternité.” But, alas, Robespierre never made a single omelet. Nor did any of the other thugs who held power in the decade after 1789. They left France in moral, political, and economic ruin, and ripe for the dictatorship of Napoleon Bonaparte. As with Robespierre, no omelets came from the egg-breaking efforts of Lenin, Mao, Pol Pot, Adolf Hitler, and Benito Mussolini either. The French experience is one example in a disturbingly familiar pattern. Call them what you will—leftists, utopian socialists, radical interventionists, collectivists, or statists—history is littered with their presumptuous plans for rearranging society to fit their vision of “the

37 38 A Republic—If We Can Keep It Where Are the Omelets? 39 common good,” plans that always fail as they kill or impoverish other Have you ever noticed how statists are constantly “reforming” their people in the process. If socialism ever earns a final epitaph, it will be own handiwork? Education reform. Health-care reform. Welfare reform. this: “Here lies a contrivance engineered by know-it-alls and busybodies Tax reform. The very fa c t that they’re always busy “reforming” is an who broke eggs with abandon but never, ever created an omelet.” implicit admission that they didn’t get it right the first 50 times. Every collectivist experiment of the twentieth century was heralded The list is endless: Canadian health care, European welfarism, as the Promised Land by statist philosophers. “I have seen the future Argentine Peronism, African postcolonial socialism, Cuban communism, and it works,” the intellectual Lincoln Steffens said after a visit to Uncle on and on ad infinitum. Nowhere in the world has the statist impulse Joe Stalin’s Soviet Union. In The New Yorker in 1984, John Kenneth produced an omelet. Everywhere—it yields the same: eggs beaten, fried, Galbraith argued that the Soviet Union was making great economic and scrambled. People worse off than before, impoverished and looking progress in part because the socialist system made “full use” of its elsewhere for answers and escape. Economies ruined. Freedoms manpower, in contrast to the less efficient capitalist West. But an extinguished. authoritative 846-page study published in 1997, The Black Book of It is a telling conclusion that statists have no successful model to Communism, estimated that the communist ideology claimed 20 million point to, no omelet they can hold up as the pièce de résistance of their lives in the “workers’ paradise.” Similarly, The Black Book documented cuisine. Not so for those of us who believe in freedom. Indeed, the death tolls in other communist lands: 45 to 72 million in China, economists James Gwartney, Robert Lawson, and Walter Block in their between 1.3 million and 2.3 million in Cambodia, 2 million in North survey, Economic Freedom of the World: 1975–1995, conclude that “No Korea, 1.7 million in Africa, 1.5 million in Afghanistan, 1 million in country with a persistently high economic freedom rating during the Vietnam, 1 million in Eastern Europe, and 150,000 in Latin America. two decades failed to achieve a high level of income. In contrast, no Additionally, all of those murderous regimes were economic basket country with a persistently low rating was able to achieve even middle cases; they squandered resources on the police and military, built vast income status. . . . The countries with the largest increases in economic and incompetent bureaucracies, and produced almost nothing for which freedom during the period achieved impressive growth rates.” there was a market beyond their borders. They didn’t make “full use” of Perhaps no one explained the lesson of all this better than the anything except police power. In every single communist country the French economist and statesman Frédéric Bastiat more than 150 years world over, the story has been the same: lots of broken eggs, no ago: omelets. No exceptions. And now that the legislators and do-gooders have so futilely F. A. Hayek explained this inevitable outcome in his seminal work, inflicted so many systems upon society, may they finally end The Road to Serfdom, in 1944. All efforts to displace individual plans where they should have begun: May they reject all systems, and with central planning, he warned us, must end in disaster and try liberty; for liberty is an acknowledgment of faith in God and dictatorship. No lofty vision can vindicate the use of the brute force His works. necessary to attain it. “The principle that the end justifies the means,” wrote Hayek, “is in ind ivduaist i l ethcs i regadedas r th e denial of all —LWR, October 1999 morals. In collectivist ethics it becomes necessarily the supreme rule.” The worst crimes of the worst statists are often minimized or dismissed by their less radical intellectual brethren as the “excesses” of men and women who otherwise had good intentions. These apologists reject the iron fist and claim that the State can achieve their egalitarian and collectivist goals with a velvet glove. But whether it is the Swedish “middle way,” Yugoslavian “worker socialism,” or British Fabianism, the result has been the same: broken eggs, but no omelets.

40 A Republic—If We Can Keep It 10

Chapter Ten

The Times that Tried Men’s Economic Souls

More than 230 years ago in Valley Forge, Pennsylvania, the brutal and storied winter of 1777–78 came to a long-awaited close. Nearly a quarter of George Washington’s Continental Army troops encamped there had died—victims of hunger, exposure, and disease. Almost every American knows that much, but few can tell you why Congress was as much to blame as the weather. For six years—from 1775 until 1781—representatives from the 13 colonies (states after July 4, 1776) met and legislated as the Second Continental Congress. They were America’s de facto central government during most of the Revolutionary War and included some of the greatest minds and admirable patriots of the day. Among their number were Thomas Jefferson, Benjamin Franklin, John and Sam Adams, Alexander Hamilton, Patrick Henry, John Jay, James Madison, and Benjamin Rush. The Second Continental Congress produced and ratified the Declaration of Independence and the country’s first written constitution, the Articles of Confederation. It also ruined a currency and very nearly the fledgling nation in the process, proving that even the best of men with the noblest of intentions sometimes must learn economics the hard way. Governments derive their revenues primarily from one, two, or all three of these sources: taxation, borrowing, and inflating the currency. 41 42 A Republic—If We Can Keep It The Times That Tried Men’s Economic Souls 43

Americans were deemed to be in no mood to replace London’s taxes Americans increasingly refused to accept payment in the with local ones so the Second Continental Congress, which before March Continental dollar. To keep the depreciating notes in circulation, 1781 faced no legal prohibition to tax, opted not to. It borrowed Congress and the states enacted legal-tender laws, measures that are considerable sums by issuing bills of credit, but with few moneyed hardly necessary if people have confidence in the soundness of the interests willing to risk their capital to take on the British Empire, the money. Though he used the power sparingly, George Washington was expenses of war and government could hardly be covered that way. vested by Congress with authority to seize whatever provisions the What the Congress chose as its principal fundraising method is revealed army needed and imprison merchants and farmers who wouldn’t sell by this statement of a delegate during the financing debate: “Do you goods for Continentals. At harvest time in 1777, with winter think, gentlemen, that I will consent to load my constituents with taxes approaching and the army in desperate need of supplies, even farmers when we can send to our printer and get a wagon-load of money, one who supported independence preferred to sell food to the redcoats quire of which will pay for the whole?” because they paid in real money—gold and silver. Washington ordered Reports of the deliberations that led to the printing of paper money guards placed along the Schuylkill River to stop supplies from reaching are sketchy but indications are that support for it was probably not the British. universal. John Adams, for instance, was a known opponent. He once referred to the idea as “theft” and “ruinous.” Nonetheless, he and Ben Another 13 Million Paper Dollars Franklin were among five committee members appointed to engrave the plates, procure the paper, and arrange for the first printing of Congress cranked out another 13 million paper dollars in 1777. Continental dollars in July 1775. Many delegates were convinced that With prices soaring the Pennsylvania legislature compounded the issuing unbacked p aper would somehow bind the colonies together in effects of bad policy: it imposed price controls on precisely those the common cause against Britain. commodities required by the army. Washington’s 11,000 men at Valley Forge froze and starved while not far away the British army spent the In any event, not even the skeptics foresaw the bottom of the winter in relative comfort, subsisting on the year’s ample local crops. It slippery slope that began with the first $2 million printed on July 21. wasn’t the world’s first, nor would it be its last, experiment with price Just four days later, $1 million more was authorized. Franklin actually controls. wanted to stop the presses with the initial issue and opposed the second batch, but the temptation to print proved too alluring. By the Congress recognized the mistake on June 4, 1778, when it adopted a end of 1775 another $3 million in notes were printed. After war resolution urging the states to repeal all price controls. But the printing erupted, the states demanded more paper Continentals from Congress. presses rolled on, belching out 63 million more paper Continentals in A fourth issue—this time for $4 million—was ordered in February 1778 and 90 million in 1779. By 1780 the stuff was virtually worthless, 1776, followed by $5 million more just five months later and another giving rise to a phrase familiar to Americans for generations: “not worth $10 million before the year was out. a Continental.” In the marketplace the paper notes fell in value even before A currency reform in 1780 asked everyone to turn in the old money independence was declared. The consequences of paper inflation at the for a new one at the ratio of 20 to 1. Congress offered to redeem the hands of American patriots were no different from what they ever were paper in gold in 1786, but this didn’t wash with a citizenry already (or still are) when rampant expansion of the money supply is conducted burned by paper promises. The new currency plummeted in value until by rogues or dictators: prices rise, savings evaporate, and governments Congress was forced to get honest. By 1781 it abandoned its legal- resort to draconian measures to stymie the effects of their own folly. As tender laws and started paying for supplies in whatever gold and silver author Ayn Rand would advise in another context nearly two centuries it could muster from the states or convince a friend (like France) to lend later, “We can evade reality, but we cannot evade the consequences of it. Not by coincidence, supplies and morale improved, which helped to evading reality.” bring the war to a successful end just two years later.

44 A Republic—If We Can Keep It

The early years of our War for Independence were truly, as Tom Paine wrote, “times that tr[ied] men’s souls” and not just because of Mother Nature and British troops. Pelatiah Webster, America’s first economist, summed up our own errors rather well when he wrote, “The 11 people of the states had been . . . put out of humor by so many tender acts, limitations of prices, and other compulsory methods to force value into paper money . . . and by so many vain funding schemes, declarations and p romises, all of whic h issued from Congress but died under the most zealous efforts to put them into operation and effect.” History texts often bestow great credit on the men of the Second Continental Congress for winning American independence. A case can also be made, however, that we won it in spite of them. —LWR, March 2008

Chapter Eleven

The Forgotten Robber Barons

Conventional wisdom, which often is mostly convention and very little wisdom, confidently instructs us that rapacious capitalists dominated and victimized American society in the latter half of the nineteenth century. The white knight of government then rode to the rescue of hapless workers and consumers. The message: business bad, government good. Honest, objective historians of the so called”robber baron” era, such as Gabriel Kolko and Burton Folsom, know that the capitalist bogeyman perspective is simplistic and overwrought. Even a bad apple or two does not a rotten barrel make. But while recently reading a forgotten little gem of a book, I came to appreciate a fact that is vastly understated in the literature, even by defenders of the market: government of the day was hardly a model of virtue. The critics zero in on a few abuses to indict private enterprise in general. But if they were consistent, they’d draw up a similar, sweeping indictment of the public sector too. The book to which I refer is Plunkitt of Tammany Hall. The first of many editions appeared in 1905 with a rather lengthy subtitle:”A Series of Very Plain Talks On Very Practical Politics, Delivered by Ex-Senator George Washington Plunkitt, The Tammany Philosopher, From His Rostrum—The New York County Court House Bootblack Stand,” 45 46 A Republic—If We Can Keep It The Forgotten Robber Barons 47 dutifully recorded and compiled by William L. Riordan of the New York that you know how to pick and reward your friends. Here’s his advice Evening Post. for getting started in the trade: Plunkitt’s motto, repeated several times in this slim volume, would Get a followin’, if it’s only one man, and then go to the district leader undoubtedly be well-known to generations of American high-schoolers and say: ‘I want to join the organization. I’ve got one man who’ll if a captain of industry had ever said it: “I seen my opportunities and I follow me through thick and thin.’ The leader won’t laugh at your took ‘em!” Plunkitt was no captain of industry. Indeed, he never did one-man followin’. He’ll shake your hand warmly, offer to propose much of anything in the private sector except work briefly at a butcher you for membership in his club, take you down to the corner for a shop after he quit school at the age of 11. He decided as a teenager to drink and ask you to call again. But go to him and say: ‘I took first make politics his life’s work, and he never looked back. His vehicle was prize at college in Aristotle; I can recite all Shakespeare forwards Tammany Hall, a vast political machine that maintained a formidable and backwards; there ain’t nothin’ in science that ain’t as familiar to hold on power through a patronage-fed bureaucracy in the nation’s me as blockades on the elevated roads and I’m the real thing in the largest city, New York. Plunkitt was a district leader within the way of silver-tongued orators.’ What will he answer? He’ll probably organization, and used its considerable connections to crawl his way up say: ‘I guess you are not to be blamed for your misfortunes, but we the political ladder—as did thousands of others over three-quarters of a have no use for you here.’ century, including Richard Croker, John Kelly, and perhaps the best- Padding the city payroll with your friends? Tammany made an art form known of all the Democratic Party bigwigs of Tammany Hall, the of it. When civil-service reform later cut into the number of jobs the infamous William Marcy “Boss” Tweed. Democratic machine could fill, Plunkitt decried the result with a straight If anything of the day deserved to be labeled a Frankenstein face: “Just think! Fifty-five Republicans and mugwumps holdin’ $3,000 and monster, it was Tammany— frightening in its reach and corrupt to the $4,000 and $5,000 jobs in the tax department when 1,555 good Tammany core. It was a patronage juggernaut, at one time filling 12,000 municipal men are ready and willin’ to take their places! It’s an outrage!” To Plunkitt, positions with its hand-picked, often incompetent, but always politically taking from some and giving to others was a key ingredient in the recipe for correct loyalists. It milked the taxpayers like cows, took care of its own, re-election. He saw nothing at all wrong with it, morally or otherwise. Using and turned out the votes of its followers, living and dead, on election the political machine to bestow benefits and buy votes came quite naturally day. For decades, it thwarted reform efforts by buying the reformers. It to him. “It’s philanthropy, but it’s politics too—mighty good politics,” he did more than just rig the system; it was the system. said. Referring to the assistance he passed out to victims of a fire in the city, Plunkitt himself became a millionaire at the game, and was proud of he declared, “Who can tell how many votes one of these fires bring me? The it. When he delivered his series of talks recorded by Riordan, he crowed poor are the most grateful people in the world, and, let me tell you, they about how he made his money through “honest graft”—by which he have more friends in their neighborhoods than the rich have in theirs.” meant being in the right place at the right time with the right inside Plunkitt and his associates had quite a nice little welfare state going—the information. Knowing, for example, that the city planned to announce a usual kind, in which the politicians get well and everybody else pays the site for a new park, Plunkitt would buy up the land in the area. Then he fare. would later sell it to the city at inflated prices. Or he would bid on city Tammany Hall was not the only big-city political machine in the property and arrange to get it at dirt-cheap prices because he’d offer country in those days, but it was undoubtedly the biggest. It bilked jobs or money to the other bidders to drop out. Outright stealing from citizens of millions of dollars and used its political power to secure its the city treasury, which Plunkitt regarded as “dishonest graft,” wasn’t place and put everybody else in theirs. Strange, isn’t it?, that in almost necessary because political pull could earn you all the cash you could all the literature critical of this era of American life, the sachems of imagine. Tammany Hall are never listed among the so-called “robber barons” of Politics doesn’t require a person to be book-smart, well-spoken, or the day. even possess good business sense, according to Plunkitt. It just requires —LWR, January 2003

Chapter Twelve

Teddy Roosevelt and the Progressive Vision of History

Over a hundred years ago, on August 31, 1910, Teddy Roosevelt gave his famous “New Nationalism” speech in Osawatomie, Kansas. In that speech the former president projected his vision for how the federal government could regulate the American economy. He defended the government’s expansion during his presidency and suggested new ways that it could promote “the triumph of a real democracy.” Roosevelt’s quest for “a real democracy” and for centralizing power was a clear break with the American founders. James Madison, for example, distrusted both democracy and human nature; he believed that separating power was essential to good government. He urged in Federalist No. 51 that “those who administer each department” of government be given “the necessary constitutional means and personal motives to resist the encroachments of others. . . . Ambition must be made to check ambition.” If power was dispersed, Madison concluded, liberty might prevail and the republic might endure. Roosevelt argued in this speech that the recent rise of corporations gave businessmen too much economic control. Madison’s constitutional restraints, therefore, allowed too much wealth to be concentrated in too 49 50 A Republic—If We Can Keep It Teddy Roosevelt and the Progressive Vision of History 51 few hands. Redistribution of wealth by government, Roosevelt thought, The Hepburn Act gave the ICC the power to reduce railroad rates would achieve “a more substantial equality of opportunity.” and placed the burden on railroads to show their rates were reasonable. The economic power of railroads triggered Roosevelt’s ire during One intervention led to another. The railroads now had to prove that his presidency. He was frustrated that railroads gave rebates to large the rates they set were fair, so Congress created a Bureau of Valuation, customers. In effect, the railroads charged varying rates for carrying the which was empowered with a huge staff to value railroad property. same products the same distance. Roosevelt thought rates should be According to historian Ari Hoogenboom, the bureau’s “final report, roughly similar for large shippers and small shippers, especially if the issued after a twenty-year study costing the public and the railroads small shippers were far from major cities. hundreds of millions of dollars, disproved assumptions by Progressives that rairoads l were . . . making fabulous returns o n their true He posed the problem this way: “Combinations in industry are the investment.” result of an imperative economic law which cannot be repealed by political legislation. The effort at prohibiting all combination has The lesson that Roosevelt learned from passing the Hepburn Act substantially failed. The way out lies, not in attempting to prevent such was that federal power was needed to break up those businesses that combinations, but in completely controlling them in the interest of the engaged in price discrimination. “The citizens of the United States,” public welfare.” Roosevelt said, “must effectively control the mighty commercial forces which they have called into being.” In practical terms, “completely controlling” railroads in the public interest meant that the Interstate Commerce Commission (ICC) would Once Roosevelt established that the federal government should have power to set rates so that larger shippers would not get such big regulate the prices railroads charged for shipping, the next step was to discounts on their high volume of business. James J. Hill, president of intervene in other industries as well. “In particular,” Roosevelt argued the Great Northern Railroad, argued that large shippers received higher in his speech, “there are strong reasons why . . . the United States rebates because their massive business created “economies of scale” for Department of Agriculture and the agricultural colleges and experiment the railroads—that is, railroads could reduce their costs best when stations should extend their work to cover all phases of farm life. . . .” He shipping large amounts of goods over the rails. The bigger shippers added, “The man who wrongly holds that every human right is contributed more to the reduced costs of shipping, so they got larger secondary to his profit must now give way to the advocate of human rebates. welfare, who rightly maintains that every man holds his property subject to the general right of the community to regulate its use to To Roosevelt and to the smaller shippers, rebates for the bigger whatever degree the public welfare may require it.” shippers were “unfair money-getting” and have “tended to create a small class of enormously wealthy and economically powerful men, The shift from the individual rights of the founders to the whose chief object is to hold and increase their power.” The founders community rights of the Progressives was a watershed transition in may have provided a “right to life, liberty, and the pursuit of happiness,” American thought in the early 1900s. But Roosevelt needed a federal but Roosevelt believed that the pursuit of happiness and private income tax to help him redistribute wealth in the national interest. The property were not absolute. “We grudge no man a fortune which title “New Nationalism” reflected his view that he and other leaders represents his own power and sagacity,” Roosevelt said—but then could determine the national interest and redistribute wealth and added, “when exercised with entire regard to the welfare of his fellows.” power accordingly. If railroads were enriching themselves and larger shippers Of the income tax Roosevelt said, “The really big fortune, the disproportionately to the smaller shippers, then Roosevelt believed swollen fortune, by the mere fact of its size, acquires qualities which such power to set rates needed to be limited: “The Hepburn Act, and the differentiate it in kind as well as in degree from what is possessed by amendment [Mann-Elkins Act] to the act in the shape in which it finally men of relatively small means, Therefore, I believe in a graduated passed Congress at the last session [1910], represent a long step in income tax on big fortunes, and in another tax which is far more easily advance, and we must go further.” collected and far more effective—a graduated inheritance tax on big

52 A Republic—If We Can Keep It fortunes, properly safeguarded against evas ion , and increasing rapidly in amount with the size of the estate.” Three years after Roosevelt’s speech, the Sixteenth Amendment, authorizing a federal income tax without regard to source, became law. 13 Roosevelt had his wish—the 1913 tax was progressive: Most people paid no income tax, and the top rate was 7 percent. Roosevelt probably envisioned rates not much higher than that, but once Congress established the principle that some people could be taxed more than others, there was no way t o calculate or determine what the national interest was. Within one-third of a century after Roosevelt’s speech, the United States had a top marginal income tax rate of more than 90 percent. When the individual liberty of the founders was transformed into the national interest of Teddy Roosevelt and the Progressives, we were only one generation away from a major threat to all our personal liberties. That threat still exists today. —BWF, October 2010 Chapter Thirteen

Of Meat and Myth

One hundred years ago, a great and enduring myth was born. Muckraking novelist Upton Sinclair wrote a novel entitled The Jungle—a tale of greed and abuse that still reverberates as a case against a free economy. Sinclair’s “jungle” was unregulated enterprise; his example was the meat-packing industry; his purpose was government regulation. The culmination of his work was the passage in 1906 of the Meat Inspection Act, e nshrined i n history, or at least in history b ooks, as a sacred cow (excuse the pun) of the interventionist state. A century later, American schoolchildren are still being taught a simplistic and romanticized version of this history. For many young people, The Jungle is required reading in high-school classes, where they are led to believe that unscrupulous capitalists were routinely tainting our meat, and that moral crusader Upton Sinclair rallied the public and forced government to shift from pusillanimous bystander to heroic do-gooder, bravely disciplining the marketplace to protect its millions of victims. But this is a triumph of myth over reality, of ulterior motives over good intentions. Reading The Jungle and assuming it’s a credible news 53 54 A Republic—If We Can Keep It Of Meat and Myth 55 source is like watching The Blair Witch Project because you think it’s a absolute falsehoods. For some of t he remainder there was only a basis documentary. of truth.”3 Given the book’s favorable publicity, it’s not surprising that it has Sinclair’s fellow writer and philosophical intimate, Jack London, duped a lot of people. Ironically, Sinclair himself, as a founder of the wrote this announcement of The Jungle, a promo that was approved by Intercollegiate Socialist Society in 1905, was personally suckered by Sinclair himself: more than a few intellectual charlatans of his day. One of them was Dear Comrades: . . . The book we have been waiting for these many fellow “investigative journalist” Lincoln Steffens, best known for years! It will open countless ears that have been deaf to Socialism. It returning from the Soviet Union in 1921 and say ing, “I have seen the will make thousands of converts to our cause. It depicts what our 1 future, and it works.” country really is, the home of oppression and injustice, a nightmare In any event, there i s much about The Jungle that Americans just of mi sery, an inferno of suffering, a human hell, a jung le of wild don’t learn from conventional history texts. beasts. The Jungle was, first and foremost, a novel. As is indicated by the And take notice and remember, comrades, this book is straight fact that the book originally appeared as a serialization in the socialist proletarian. It is written by an intellectual proletarian, for the journal “Appeal to Reason,” it was intended to be a polemic—a diatribe, proletarian. It is to be published by a proletarian publishing house. if you will—not a well-researched and dispassionate documentary. It is to be read by the proletariat. What Uncle Tom’s Cabin did for the Sinclair relied heavily both on his own imagination and on the hearsay black slaves The Jungle has a large chance to do for the white slaves of others. He did not even pretend that he had actually witnessed the of today.4 horrendous conditions he ascribed to Chicago packinghouses, nor to The fictitious characters of Sinclair’s novel tell of men falling into have verified them, nor to have derived them from any official records. tanks in meat-packing plants and being ground up with animal parts, Sinclair hoped the book would ignite a powerful socialist movement then made into “Durham’s Pure Leaf Lard.” Historian Stewart H. on behalf of America’s workers. The public’s attention focused instead Holbrook writes, “The grunts, the groans, the agonized squeals of on his fewer than a dozen pages of supposed descriptions of unsanitary animals being butchered, the rivers of blood, the steaming masses of conditions in the m eat-packing plants. “I aimed a t the public’s heart,” he intestines, the various stenches . . . were displayed along with the later wrote, “and by accident I hit it in the stomach.”2 corruption of government inspectors”5 and, of course, the callous greed Though his novelized and sensational accusations prompted of the ruthless packers. congressional investigations of the industry, the investigators Most Americans would be surprised to know that government meat themselves expressed skepticism about Sinclair’s integrity and inspection did not begin in 1906. The inspectors Holbrook cites as being credibility as a source of information. In July 1906, President Theodore mentioned in Sinclair’s book were among hundreds employed by Roosevelt stated his opinion of Sinclair in a letter to journalist William federal, state, and local governments for more than a decade. Indeed, Allen White: “I have an utter contempt for him. He is hysterical, Congressman E.D. Crumpacker of Indiana noted in testimony before the unbalanced, and untruthful. Three-fourths of the things he said were House Agriculture Committee in June 1906 that not even one of those

3 Roosevelt to William Allen White, July 31, 1906, Elting E. Morison and John M. Blum, eds., The Letters of Theodore Roosevelt, (Harvard University Press, 1951–54), vol. 5, p. 340. 4 Mark Sullivan, Our Times: The United States, 1900–1925; vol. 2: America Finding Herself 1 www.spartacus.schoolnet.co.uk/Jsteffens.htm (Charles Scribner’s Sons, 1927), p. 473. 2 Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 5 Stewart H. Holbrook, The Age of the Moguls (Doubleday & Company, 1953), pp. 110–111. 1900–1916 (Quadrangle Books, 1967), p. 103.

56 A Republic—If We Can Keep It Of Meat and Myth 57 officials “ever registered any complaint or [gave] any public information Gabriel Kolko, a socialist but nonetheless a historian with a respect for with respect to the manner of the slaughtering or preparation of meat facts, dismisses Sinclair as a propagandist and assails Neill and or food products.” 6 Reynolds as “two inexperienced Washington bureaucrats who freely 9 To Crumpacker and other contemporary skeptics, “Either the admitted they knew nothing” of the meat-packing process. Their own Government officials in Chicago (were) woefully derelict in their duty, subsequent testimony revealed that they had gone to Chicago with the or the situation over there (had been) outrageously overstated to the intention of finding fault with industry practices so as to get a new 10 country.”7 If the packing plants were as bad as alleged in The Jungle inspection law passed. surely the government inspectors who never said so must be judged as According to the popular myth, there were no government guilty of neglect as the packers were of abuse. inspectors before Congress acted in response to The Jungle and the Some two million visitors came to tour the stockyards and packing- greedy meat packers fought federal inspection all the way. The truth is houses of Chicago every year. Thousands of people worked in both. Why that not only did government inspection exist, but meat packers is it that it took a novel written by an anticapitalist ideologue who spent themselves supported it and were in the forefront of the effort to extend 11 but a few weeks in the city to unveil the real conditions to the American it so as to ensnare their smaller, unregulated competitors. public? When the sensational accusations of The Jungle became worldwide All the big Chicago packers combined accounted for less than 50% news, foreign purchases of American meat were cut in half and the meat of the meat products produced in the United States, but few if any packers looked for new regulations to give their markets a calming charges were ever made against the sanitary conditions of the sense of security. The only congressional hearings on what ultimately packinghouses of other cities. If the Chicago packers were guilty of became the Meat Inspection Act of 1906 were held by Congressman anything like the terribly unsanitary conditions suggested by Sinclair, James Wadsworth’s Agriculture Committee between June 6 and 11. A wouldn’t th e y be foolish l y exposing them s elv e s to devast a ting losses of careful reading of the deliberations of the Wadsworth committee and market share? the subsequent floor debate leads inexorably to one conclusion: knowing that a new law would allay public fears fanned by The Jungle, In this connection, historians with an ideological axe to grind bring smaller rivals under control, and put a newly laundered against the market usually ignore an authoritative 1906 report of the government seal of approval on their products, the major meat packers Depart-ment of Agriculture’s Bureau of Animal Husbandry. Its strongly endorsed the proposed act and only quibbled over who should investigators provided a point-by-point refutation of the worst of pay for it. Sinclair’s allegations, some of which they labeled as “willful and deliberate misrepresentations of fact,” “atrocious exaggeration,” and In the end, Americans got a new federal meat inspection law, the big packers got the taxpayers to pick up the entire $3 million price tag for “not at all characteristic.”8 its implementation, as well as new regulations on the competition, and Instead, some of these same historians dwell on the Neill-Reynolds another myth entered the annals of anti-market dogma. Report of the same year because it at least tentatively supported Sinclair. It turns out that neither Neill nor Reynolds had any experience To his credit, Sinclair actually opposed the law because he saw it for in the meat-packing business and spent a grand total of two and a half what it really was—a boon for the big meat packers. He had been a fool weeks in the spring of 1906 investigating and preparing what turned and a sucker who ended up being used by the very industry he hated. out to be a carelessly written report with predetermined conclusions. But then, there may not have been an industry that he didn’t hate.

6 U.S. House Committee on Agriculture, “Hearings on the So-called ‘Beveridge Amendment’ to the Agriculture Appropriation Bill,” 59th Congress, 1st Session, 1906, p. 9 Kolko, op. cit., p. 105. 194. 10 “Hearings,” p. 102. 7 Ibid., p. 194 11 Upton Sinclair, “The Condemned-Meat Industry: A Reply to Mr. J. Ogden Armour,” 8 Ibid., pp. 346–350. Everybody’s Magazine, XIV, 1906, pp. 612–613.

58 A Republic—If We Can Keep It Of Meat and Myth 59

Sinclair published more than 90 books before he died (at the age of permanent affliction of capitalism and seemed utterly unaware of the 90) in 1968—King Coal, Oil!, The Profits of Religion, The Flivver King, endless state interventions that had brought it on in the first place (see Money Writes!, The Moneychangers, The Goose-Step: A Study of American my “Great Myths of the Great Depression” at FEE.org). Education, The Goslings: A Study of the American Schools, et cetera—but Was Upton Sinclair a nincompoop? You decide. This much is clear: none came anywhere close to the fame of The Jungle. One (Dragon’s early in the 20th century, he cooked up a work of fiction as a device to Teeth), about the Nazi rise to power, earned him a Pulitzer in 1942, but help in his agitation for an economic system (socialism) that doesn’t almost all the others were little-noticed and even poorly-written class work and that was already known not to work. For the next six decades warfare screeds and shabby “exposés” of one industry or another. Many he learned little if anything about economics, but he never relented in were commercial flops. Friend and fellow writer Sinclair Lewis took his support for discredited schemes to put big g ove r nment in charge of Sinclair to task for his numerous errors in a letter written to him in other people’s lives. January 1928: Myths survive their makers. What you’ve just read about Sinclair I did not want to say these unpleasant things, but you have written and his myth is not at all “politically correct.” But defending the market to me, asking my opinion, and I give it to you, flat. If you would get from historical attack begins with explaining what really happened in over two ideas—first that anyone who criticizes you is an evil and our history. Those who persist in the shallow claim that The Jungle capitalist-controlled spy, and second that you have only to spend a stands as a compelling indictment of the market should take a look at few weeks on any subject to become a master of it—you might yet the history surrounding this honored novel. Upon inspection, there regain your now totally lost position as the leader of American seems to be an unpleasant odor hovering over it. socialistic journalism.12 —LWR, February 2002 On three occasions, Sinclair’s radical socialism led him into electoral politics. Running on the Socialist Party ticket for a congressional seat in New Jersey in 1906, he captured a measly 3% of the vote. He didn’t fare much better as the Socialist candidate for governor of California in 1926. In 1934, however, he secured the nomination of the Democratic Party for the California governorship and shook up the political establishment with a program he called EPIC (“End Poverty in California”). With unemployment in excess of 20% and the state seething in discontent, most Californians still couldn’t stomach Sinclair’s penchant for goofy boondoggles and snake oil promises. Nonetheless, he garnered a very respectable 38% against the incumbent Republican Frank Merriman. The EPIC platform is worth a mention, if only to underscore Sinclair’s lifelong, unshakeable fascination with crackpot central-planning contriv- ances. It called for a massive tax increase on corporations and utilities, huge public employment programs (he wanted to put the unemployed to work on farms seized by the state for failure to pay taxes), and the issuance of money-like “scrip” based on goods produced by state- employed workers. He thought the Depression was probably a

12 www.spartacus.schoolnet.co.uk/Jupton.htm

Chapter Fourteen

Our Presidents and the National Debt

During the last 75 years the United States has failed to balance its annual budget over 90 percent of the time. What’s worse, the government has spent money so recklessly that we now owe over $8.2 trillion, and Congress recently raised the debt ceiling to $9 trillion. Such a trend is ominous because a country’s national debt is a mirror of its economic future and its national character as well. With our piles of IOUs, we borrow from the future to indulge the present. If we study our national debt, we can discover some generalizations that help us understand how our presidents and our national character have changed over time.

1. Our first presidents took the national debt seriously and handled it with courag e and integrity. Our nation began with dangerous financial liabilities. When we fought the Revolutionary War we borrowed over $75 million in cash and supplies from individual patriots, from all 13 colonies, and from France and Holland. Our Founders, led by President George Washington

61 62 A Republic—If We Can Keep It Our Presidents and the National Debt 63 and his treasury secretary, Alexander Hamilton, were determined to Interestingly, in the 50 years after the Civil War, from 1866 to 1916, establish the U.S. credit by passing a tariff and a whiskey tax that would the presidents were committed to restoring American credit, and the generate the revenue to help retire our war debt. national debt was slashed from $2.7 billion to $1.2 billion. But World Washington, in his Farewell Address, described public credit as “a War I sent the debt spiraling again, this time to $24 billion by 1920. very important source of strength and security.” He recommended that World War II added another digit to the nation’s debt, which leaped we “use it as sparingly as possible, avoiding occasions of expense by from $43 billion to $259 billion from 1940 to 1945. cultivating peace. . . .” Avoid “the accumulation of debt. . . ,” Washington Those war debts have had a strong impact on U.S. tax policy. The urged, “by vigorous exertions in time of peace to discharge the debts income tax was introduced in America during the Civil War, but it was which unavoidable wars have occasioned, not ungenerously throwing removed shortly after the war in 1872. After the Sixteenth Amendment upon posterity the burthen which we ourselves ought to bear.” Not only was passed in 1913, the new income tax had a top marginal rate of 7 did Washington wage the war, serve as president, and help establish percent. But five years later, in the midst of World War I, the top rate our institutions of liberty, but he urged his generation to pay off the was hiked to 77 percent. It was lowered in the 1920s, but during World national debt as well. War II the marginal tax rate jumped to 90 percent. President Franklin Our first seven presidents were committed to Washington’s goal. Roosevelt also introduced the idea of withholding income (proposed by They chipped away so steadily at the national debt that James Madison, a Treasury staff that included a young Milton Friedman) and forcing the one of those presidents and the “Father of the Constitution,” lived to see employers to do the paperwork. the entire debt eradicated. In fact, by his death in 1836, the United States had actually begun running a surplus. 3. Most presidents have run surpluses, not deficits. How to handle the national surplus became a political issue that In fact, from 1791 to 1931, we had annual surpluses over 70 percent President Andrew Jackson had to address. “It appears to me,” Jackson of the years. After the Civil War, for example, we ran surpluses for 28 said, “that the most safe, just, and federal disposition which could be straight years. Oddly, those presidents who obtained the most dramatic made of the surplus revenue, would be its apportionment among the surpluses have often been those most condemned in the leading several states according to their ratio of representation.” presidential polls. In Arthur Schlesinger’s 1962 poll, four of the bottom When Jackson’s suggestion became law, the effect was immediate five presidents—Coolidge, Pierce, Grant, and Harding—secured budget and nationwide. The residents of the Michigan Territory, for example, surpluses in each of their 20 total years as presidents. Under Franklin frantically clamored for statehood so that they would be eligible to Pierce, for example, the entire national debt was cut almost in half. scoop up some of the overflow from the federal treasury. Washington’s Under Harding and Coolidge, the national debt was almost slashed by dream of a creditworthy nation had become a reality. one-third. On the other hand, Lincoln, Wilson, and Franklin Roosevelt, whom 2. Wars have spiked the national debt. Schlesinger’s historians ranked among the top four presidents, broke all records for budget deficits. It is astonishing but true that these three The national debt has not increased slowly; instead, it has increased presidents incurred more debt in their administrations than the entire sharply during major wars, starting with the Civil War. The earlier national debt of $259 billion in 1945. In other words, of the first 32 wars—the Revolutionary War, the War of 1812, and the Mexican War— presidents, under 29 of them we had a budget surplus of $4 billion; all created small jumps in the national debt, but the presidents who under Lincoln, Wilson, and Roosevelt we had a budget deficit of $263 followed them all whittled down those debts quickly. In the Civil War, billion. however, the national debt skyrocketed from $60 million to $2.7 billion—more than a 45-fold increase, which is the greatest Granted, they were war presidents, but that is a key point. Yet proportional leap of any war in U.S. history. Washington had fought a major war, and as president he wanted to pay

64 A Republic—If We Can Keep It off the debt from that war in his generation. Lincoln, Wilson, and Roosevelt did not do that and do not seem to have had any ambition to do so. Modern presidents, those who have served since the 1962 poll, are eager to secure their place in history. They may realize that fame and 15 adulation are no longer given to those who “use [public credit] as sparingly as possible.” Perhaps the slogan of the modern presidents could be, “It is better to have spent and lost than never to have spent at all.”

4. Regardless of war or political party, modern presidents have tended to double the national debt about every nine years. Even as late as post-World War II (1945–1960) the national debt increased at less than 1 percent per year. But since the Kennedy era and the Schlesinger poll, we have had four Democratic and five Republican presidents. Under these nine men, the national debt has doubled almost five times, from $289 billion in 1961 to a newly proposed ceiling of $9 Chapter Fifteen trillion. Whether the issue has been hurricanes, farm subsidies, or medical care (none of which is a subject for federal aid, according to the The Progressive Income Tax in U.S. History Constitutio n ), all these presidents have spent first and asked questions later. America’s founders rejected the income tax entirely, but when they Should that pattern of doubling the national debt every nine years spoke of taxes they recognized the need for uniformity and equal continue—and there are very few politicians who wish to stop it—our protection to all citizens. “[A]ll duties, imposts and excises shall be debt by the end of t he 21st c entury will increase to ab out $9 quadrillion, uniform throughout the United States,” reads the U.S. Constitution. And or (even if the U. S. population triples) about $10 million per person. 80 years later, in the same spirit, the Fourteenth Amendment promised “equal protection of the laws” to all citizens. In discussing public debt, Washington said that congressmen needed to bear responsibility for retiring the debt, and “that public In other words, the principle behind the progressive income tax— opinion should cooperate” as well. Will we heed the advice of this the more you earn, the larger the percentage of tax you must pay— thrifty president and demand accountability from our elected officials? would have been appalling to the founders. They recognized that, in James Madison’s words, “the spirit of party and faction” would prevail if —BWF, August 2006 Congress could tax one group of citizens and confer the benefits on another group. In Federalist No. 10, Madison asked, “[W]hat are the different classes of legislators but advocates and parties to the causes which they determine?” He went on to say, “The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which

65 66 A Republic—If We Can Keep It The Progressive Income Tax in U.S. History 67 greater opportunity and temptation are given to a predominant party to later repealed the order, but still allowed top incomes to be taxed at a trample on the rules of justice.” marginal rate of 90 percent. During the 1800s economic thinking in the United States usually conformed to the founders’ guiding principles of uniformity and equal Subsidies for Friends, Audits for Enemies protection. One exception was during the Civil War, when a progressive income tax was first enacted. Interestingly, the tax had a maximum rate Roosevelt thus became the first president to practice on a large of 10 percent, and it was repealed in 1872. As Representative Justin scale what Madison had called “the spirit of party and faction” and what Morrill of Vermont observed, “in this country we neither create nor Field had called the “war of the poor against the rich.” With a steeply tolerate any distinction of rank, race, or color, and should not tolerate progressive income tax in place, Roosevelt used the federal treasury to anything else than entire equality in our taxes.” reward, among others, farmers (who were paid not to plant crops), silver miners (who had the price of their product artificially inflated), When Congress passed another income tax in 1894—one that only and southerners in the vote-rich Tennesees Vally e (wit h dams a nd hit the top 2 percent of wealth holders—the Supreme Court declared it cheap electricity). unconstitutional. Stephen Field, a veteran of 30 years on the Court, was outraged that Congress would pass a bill to tax a small voting bloc and In the 1936 presidential election, Senator Hiram Johnson of exempt the larger group of voters. At age 77, Field not only repudiated California, a Roosevelt supporter, watched in amazement as the Congress’s actions, he also penned a prophecy. A small progressive tax, President mobilized “the different agencies of government” to dole out he predicted, “will be but the stepping stone to others, larger and more subsidies for votes. “He starts with probably 8 million votes bought,” sweeping, till our political contests will become a war of the poor Johnson calculated. “The other side has to buy them one by one, and against the rich.” they cannot h ope to m atch his money.” In that campaign, Roosevelt defeated the Republican Alf Landon by an electoral vote of 523–8. In 1913, almost 20 years later, the ideas of uniform taxation and equal protection of the law for all citizens were overturned when a The flip side of rewards for supporters was investigations of constitutional amendment permitting a progressive income tax was opponents. Senator James Couzens of Michigan, who supported ratified. Congress first set the top rate at a mere 7 percent—and Roosevelt even more vigorously than Johnson did, had said before married couples were only taxed on income over $4,000 (equivalent to Roosevelt took office, “Give me control of the Bureau of Internal $80,000 today). During the tax debate, William Shelton, a Georgian, Revenue and I will run the politics of the country.” supported the income tax “because none of us here have $4,000 Couzens lived to see the bureau begin to investigate Roosevelt’s incomes, and somebody else will have to pay the tax.” As Madison and opponents. It started with an investigation of Senator Huey Long of Field had feared, the seeds of class warfare were sown in the strategy of Louisiana, who had threatened to run for president against Roosevelt. different rates for different incomes. Next came an audit of William Randolph Hearst, whose newspaper It took the politicians less than one generation to hike the tax rates empire strongly opposed Roosevelt for president in 1936. Moses and fulfill Field’s prophecy. Herbert Hoover and Franklin Roosevelt, Annenberg, publisher of the Philadelphia Inquirer, vehemently opposed using the excuses of depression and war, permanently enlarged the Roosevelt’ s re-election camp aign in 1936; the next year he had a full- income tax. Under Hoover, the top rate was hiked from 24 to 63 scale audit, which was followed by a prison term. percent. Under Roosevelt, the top rate was again raised—first to 79 Elliott Roosevelt, the president’s son, conceded in 1975 that “my percent and later to 90 percent. In 1941, in fact, Roosevelt proposed a father may have been the originator of the concept of employing the IRS 99.5 percent marginal rate on all incomes over $100,000. “Why not?” he as a weapon of political retribution.” But he was quick to add that “each said when an adviser questioned him. of his successors followed his lead.” That is a key point: once the After that proposal failed, Roosevelt issued an executive order to tax machinery of retribution is in place, it is hard for politicians to resist all income over $25,000 at the astonishing rate of 100 percent. Congress using it. When Richard Nixon, a Republican, became president, he

68 A Republic—If We Can Keep It sounded like his Democrat counterparts when he described whom he wanted as commissioner of internal revenue. Nixon said, “I want to be sure that he is . . . ruthless . . . that he will do what he is told, that every income-tax return I want to see , I see. T h at he will go after our enemies and not go after our friends. It is as simple as that.” 16 If we want to lessen “the spirit of party and faction,” as Madison recommended, and if we want to avoid a “war of the poor against the rich,” as Field anticipated, we would do well to scrap the progressive income tax. —BWF, May 2003

Chapter Sixteen

Cigarette Taxes Are Hazardous to Our Health

“In the great chess-board of human society,” wrote Adam Smith in The Theory of Moral Sentiments, “every single piece has a principle of motion o f its own, altogether different from that which the legislature might chuse to impress upon it.” With monotonous regularity legislatures are busy fine-tuning the lives and habits of millions of citizens—utterly oblivious, in most cases, to Smith’s time-honored wisdom. As if keeping the peace, dispensing justice, and protecting the nation from foreign aggressors were petty, part-time assignments, nanny-state lawmakers are forever prodding us to moderate or abandon certain pastimes they say aren’t good for us (even if many legislators engage in those very pastimes themselves). And if in the process of altruistically prodding us they make a few bucks for their favorite government program, well, that’s just what the nanny state is really all about anyway. If Adam Smith were with us today he could point to cigarette taxes as proof of what he wrote more than 200 years ago. Armed with the rhetoric of moral righteousness, the Carry Nations of the cigarette wars are jacking up taxes on smokes higher than smoke itself. It’ll discourage 69 70 A Republic—If We Can Keep It Cigarette Taxes Are Hazardous to Our Health 71 a bad habit, they tell us, as they spend the revenues at least as fast as In his 1963 book, How Dry We Were: Prohibition Revisited, Henry they roll in. Lee explained what happened between 1919 and 1933 when alcohol This past summer New York City raised its municipal cigarette tax was banned: The law drove the production and consumption of booze from eight cents a pack to $1.50. New York State imposes the nation’s underground, and people who wanted to either make or drink the stuff highest per-pack tax, also $1.50, which means that $3 of every $7 pack turned to crime (and amazing creativity) to satisfy their desires. Profits of cigarettes in the Big Apple goes just for the government’s take at the in the trade soared, thanks to the ban itself. Smuggling became an art retail level. Never mind the baked-in hidden taxes from the tobacco form. Likewise, today’s endless and costly drug war has produced side farm to the local 7-Eleven that go into the retail price. effec ts that even a diehard drug warrior can’t deny: an entire subculture that guarantees both violence and drugs to whoever wants them. When Mayor Michael Bloomberg signed the latest tax hike into law at a news conference on June 30, a citizen tossed him a very cogent inquiry. According to the New York Times, Audrey Silk of Citizens Legal Loophole Lobbying Against Smoker Harassment asked His Honor, “I know that And so it is with cigarettes. It will be ever more so if taxes reach you love to eat chunky peanut butter with bacon and bananas. How prohibitive levels. At least one legal loophole for avoiding the taxes is about I come out and start a campaign to tax that bacon that’s going to helping to keep the cigarette trade relatively peaceful for the moment: cause heart disease, and tax that super-chunky peanut butter that’s Indian reservations can sell cigarettes tax-free and sales at their stores going to kill you?” After conferring with an expert at his side, the Mayor and websites are soaring. essentially said that smoking was different because it’s addictive. Besides, the city’s deficit-ridden budget needed the expected $111 Meantime, low-tax, tobacco-growing states like Kentucky and North million a year the $1.50 per pack would yield. Carolina are magnets for smugglers who buy smokes there and truck them to high-tax, high-price states like Michigan. Authorities concede Who’s really the addict here? I know of many people who have that smuggling is on the rise. An untold and growing volume of tax given up smoking. I don’t know of any politicians who have given up on dollars is being spent to fight it. making money from it. In a recent commentary for the Mackinac Center for Public Policy, Indeed, federal, state, and local governments are the overwhelming researcher James Damask revealed an especially seamy and disturbing reason why the average price of a pack of cigarettes has doubled in the side of cigarette-tax evasion. On July 21, 2000, 13 months before the past five years. In the mid-’90s my own state of Michigan tripled its tax World Trade Center attack, FBI agents raided a house in Charlotte, from 25 to 75 cents. In August of this year it added another 50 cents. I North Carolina, used as a smuggling base. Inside they found cash, hasten to add that my concern is not for my own pocketbook; I’ve never weapons (including shotguns, rifles, and an AK-47), documents written smoked anything but a paycheck. My first concern is personal liberty, in Arabic-and cigarettes. Lots of cigarettes. Why? Because, Damask says, which, if it means anything, surely means the right to enjoy risky “the operation exploited the tax differential between North Carolina, pursuits like hang-gliding or even smoking as long as your actions do n’t which has low cigarette taxes at 5 cents a pack, and Michigan, with high aggress against others. taxes at 75 cents a pack” (now $1.25). But more to the point, the ever-higher taxes on cigarettes are Apparently, the smugglers would drive the 680 miles from Charlotte counterproductive in certain crucially important ways. As Adam Smith to Detroit in a rented van with 800 to 1,500 cartons of cigarettes suggested, people are going to find ways to do what they want to do purchased with cash in North Carolina. The cigarettes would then be even if their friendly congressman would prefer that they didn’t. sold to convenience stores in Detroit, which sold them to customers. Cigarette taxes are producing some of the same effects that alcohol Authorities say that each trip—which required absolutely no special prohibition brought in the 1920s and early ’30s and that drug skills for the 13-hour drive—would net $3,000 to $10,000. The profits prohibition brings today. would then be shuttled back to Charlotte. The homeowner and recipient

72 A Republic—If We Can Keep It of the pofits r was a man believed to hae v tiesto foeig r n tero r rist organizations. The lesson? Like Prohibition, high taxes lead to big profit opportunities for people who break the law, which leads to smuggling, which in turn invites some pretty nasty people into the business. 17 Politicians who say they’re helping our health by taxing cigarettes so heavily are not counting all the costs of their effort with as much care as they count their tax revenue. And Adam Smith was right as rain. —LWR, November 2002

Chapter Seventeen

A Man Who Knew the Value of Liberty

A television audience in the millions feasts on the glitz and glamor of Hollywood whenever the Academy Awards are bestowed. My thoughts are elsewhere that Sunday night—on a friend who won an Oscar nearly 30 years ago. February 25, usually a few days after the ceremony, marks the anniversary of the day he was killed . On the night of the 57th Oscars in 1985, Amadeus claimed Best Picture, F. Murray Abraham won for best actor, and Sally Field for best actress. Then came the announcement of the winner of the award for best supporting actor. To the stage bearing the widest grin of his life bounced a man few Americans had ever heard of. He had acted in only one motion picture. He had been trained as a physician in his native Cambodia, where he had witnessed unspeakable cruelty and endured torture before escaping and finding his way to America barely five years earlier. He was Dr. Haing S. Ngor. Ngor’s Oscar-winning performance in The Killing Fields gave him a platform to tell the world about the mass murder that occurred between 1975 and 1979 in Cambodia at the hands of the Khmer Rouge communists. When I met Ngor at a conference in Dallas a few months 73 74 A Republic—If We Can Keep It A Man Who Knew the Value of Liberty 75 after Oscar night, I was struck by the intensity of his passion. Perhaps the state would always make the right decisions for the good of no one loves liberty more than one who has been denied it at the point everyone. I remember so many times they would say, ‘It is always better of a gun. We became instant friends and stayed in frequent contact. to kill by mistake than to not kill at all.’ ” When he decided to visit Cambodia in August 1989 for the first time Churches and pagodas were demolished and thousands of Buddhist since his escape ten years before, he asked me to go with him. Dith Pran, monks and worshippers were murdered. Schools were closed down, the photographer Ngor portrayed in the movie, was among the small and modern medicine was forbidden in favor of quack remedies and number in our entourage. Experiencing Cambodia with Ngor and Pran sinister experimentation. By 1979 only 45 doctors remained alive in the so soon after the genocide left me with vivid impressions and lasting whole country; more than 4,000 had perished or fled. Eating in private memories. and scavenging for food were considered crimes against the state. So But Cambodia in 1989 was still a universe away from the Cambodia was wear i ng eyeglas s es , which was s een as evidence that o ne had r ead of 1979. In spite of the country’s continued suffering on a grand scale, I too much. knew it was a playground compared to the three and a half years that Early estimates of the death toll from starvation, disease, and Ngor and Pran lived through and miraculously survived. execution during Pol Pot’s tyranny ranged as high as three million—in a During that time, crazed but battle-hardened and jungle-toughened nation of only eight million inhabitants when he took power. Most now revolutionaries who had seized power in 1975 set about to remake put the figure in the neighborhood of two million deaths. Cambodian society. Their leader, Pol Pot, embraced the most radical Haing Ngor didn’t just see these things; he endured them. He had to versions of class warfare, egalitarianism, and state control. Mao and get rid of his eyeglasses and disappear as a doctor. He reappeared as a Stalin were his heroes. In the warped minds of Pol Pot and his Khmer cab driver, hoping he and his wife would not draw the attention of the Rouge hierarchy, the “evils” they aspired to destroy included all vestiges Khmer Rouge. Nonetheless, on more than one occasion, he fell prey to of the former governments of Cambodia: city life, private enterprise, the their brutality. In one torturous episode, one of his fingers was sliced family unit, religion, money, modern medicine and industry, private off. In another, his wife died in his arms from complications during property, and anything that smacked of foreign influence. They savaged childbirth. Ngor’s skills as a physician might have saved her, but he an essentially defenseless population already weary of war. The Khmer knew if he revealed he was a doctor they both would have been Rouge manufactured the killing fields for which the film was later executed on the spot. He eventually escaped Cambodia through named. Thailand, landing in America in 1980, a year and a half after a One day after taking power, the Khmer Rouge forcibly evacuated the Vietnamese invasion eradicated the Khmer Rouge regime. populations of all urban areas, including the capital, Phnom Penh, a city Haing Ngor believed the world must know these things, fully and swollen by refugees to at least two million inhabitants. Many thousands graphically. When fate led to a chance to act in a movie about the of men and women—including the sick, elderly, and handicapped—died period, he grabbed it and performed brilliantly. He deserved the Oscar it on the way to their “political rehabilitation” in the countryside. earned him, even though he often said that he really didn’t have to “act.” Survivors found themselves slaving away at the most grueling toil in the He had personally suffered through calamities much worse than those rice fields, often separated from their families, routinely beaten and depicted in the film. He was driven to do well so that the rest of us tortured for trifling offenses or for no reason at all, kept hungry by would remember what happened and those to whom it happened. meager rations, a nd facing certain death for the slightest challenge to authority. One cold morning in February 1996 I learned that Dr. Haing S. Ngor had been shot and killed the day before—not somewhere in Southeast Thon Hin, a top official in the Cambodian foreign ministry at the Asia, but in downtown Los Angeles. The perpetrators, it turned out, time of our 1989 visit, told me of the propaganda blasted daily from were ordinary gang thugs trying to rob him as he got out of his car. They speakers as citizens labored in the fields: “They said that everything took a locket that held the only picture he still had of his deceased wife. belonged to the state, that we had no duty to anything but the state, that

76 A Republic—If We Can Keep It

For Haing Ngor, rediscovering his freedom after experiencing hell on earth wasn’t enough. He couldn’t relax, breathe sighs of relief, or resume living a quiet or anonymous life. He felt compelled to tell his story so others would know what awful things total government can do. Part III He forced us to ponder and appreciate life more fundamentally than ever before.

Enjoy the Oscars if you watch them. We should be thankful for people like Haing Ngor, who did more to educate for liberty in a few short years than most people who take their liberty for granted will ever do in their lifetimes. —LWR, January 2009 Our Cousins Stand for Liberty

Chapter Eighteen

Scotland: Seven Centuries since William Wallace

I am an American of Scottish extraction, and few things stir my blood more than the colorful history of my ancestral homeland. Through the centuries, rugged Scots stand tall among those heroes who gave every ounce of their lives for such noble ideals as liberty, indepen d ence, and self-reliance. Mel Gibson’s epic film Braveheart, released in 1995, introduced many non-Scots to one of our greatest heroes, William Wallace. A fierce and uncompromising Scottish patriot, Wallace gave English invaders fits for years until his capture on August 5, 1305. He was hauled to London to face charges of insurrection, found guilty, and brutally executed by Edward I seven centuries ago, on August 23, 1305. Edward was deservedly known as the “Hammer of the Scots.” His designs on Scotland were apparent shortly after he ascended to the English throne in 1272, when Wallace was but two years old. While the Scottish people themselves may have been staunch in their desire to retain their own national identity, many of their nobility were unprincipled opportunists who connived with Edward to allow English encroachment in exchange for political favors. More than a dozen of 79 80 A Republic—If We Can Keep It Scotland: Seven Centuries since William Wallace 81 them claimed the Scottish throne in 1290 and then invited Edward’s leaders issued the famous Declaration of Arbroath in hopes that the arbitration to settle the question. Pope would convince the English to leave Scotland alone. This The English king chose John Balliol to be his royal puppet in declaration, written a full four and a half centuries before the American exchange for the Scottish king’s oath of loyalty to England. But in 1296 Declaration of Independence, enunciated the principle that a king must Balliol found the spine to differ with Edward over an important issue, rule by the consent of the governed, who in turn have a duty to get rid of and the two nations went to war. him if he doesn’t. It includes these stirring words: “It is not for honors or glory or wealt h t h at we fight, bu t for freedom alone, wh ic h no good Young Wallace emerged early as a Scottish patriot of special mettle, man gives up except with his life.” leading his countrymen to a smashing victory at the Battle of Stirling Bridge on September 11, 1297. “All powerful as a swordsman and un- The crowns of England and Scotland were united in the early rivalled as an archer,” John D. Carrick wrote in his classic Life of Sir seventeenth century and the parliaments were merged a hundred years William Wallace of Elderslie, “his blows were fatal and his shafts un- later but Scotland retains a strong national identity within the United erring: as an equestrian, he was a model of dexterity and grace; while Kingdom. Wallaceite rugged individualism was apparent in the ideas of the hardships he experienced in his youth made him view with the Scottish Enlightenment, which produced Adam Smith, David Hume, indifference the severest privations incident to a military life.” and other eighteenth-century thinkers committed to limited government, self-reliance, freer markets, and personal freedom. William Wallace’s courage united Scotland, but 11 months after Stirling, the Ewart Gladstone, one of Britain’s greatest prime ministers and an Scots were outnumbered at Falkirk and dealt a crushing blow. His ardent opponent of excessive government, had deep roots in Scotland. forces scattered, Wallace took his campaign for independence to the courts of Europe in search of foreign alliances. When he returned to Though my Scottish blood and love of liberty make me proud of this Scotland in 1303, he was the most-wanted fugitive in the country, and heritage, I worry that Scots in more recent decades have forsaken their he was betrayed to Edward in the summer of 1305. The evidence is history. The spirit of Wallace and the contributions of Hume, Smith, and strong that it wasn’t commoners who broke faith with him, but highly Gladstone are perfunctorily recognized, but in practice Scottish placed Scottish officials who sold out to Edward. In London he was policymakers seem wedded to the coercive nanny state. The great Scots hanged and then drawn and quartered while still alive. Before his of the past would probably be shocked to know how extensively their torture and execution, he responded to the charges against him with descendents now depend on the largess of government. As Alexander these words: Hamilton, an American of Scottish ancestry, once wisely warned, “Control of a man’s subsistence is control of his will.” I cannot be a traitor, for I owe him no allegiance. He is not my Sovereign; he never received my homage; and whilst life is in this persecuted body, he never shall receive it. To the other points Modern Reality whereof I am accused, I freely confess them all. As Governor of my “Scotland is the most socialist part of Britain,” says John Blundell, country I have been an enemy to its enemies; I have slain the former director of the Institute of Economic Affairs in London. “It even English; I have mortally opposed the English King; I have stormed has strong credentials as the most socialist part of the European Union. and taken the towns and castles which he unjustly claimed as his Its public sector, including municipal agencies, consumes more of the own. If I or my soldiers have plundered or done injury to the houses [gross domestic product] than in any other OECD nation.” The romantic, or ministers of religon,i I repent me of my sin ; but i t is n ot of noble image of proud and independent Scots has given way to a very Edward of England I shall ask pardon. different reality: a heavily subsidized population that overwhelmingly Avenging Wallace’s death became a rallying cry in the years supports political candidates who demand even more subsidies. thereafter. Edward died in 1307 with Scotland still simmering in revolt. Still, 705 years after the death of William Wallace, Scots know who Under Robert the Bruce, the forces of Edward II were decisively Wallace was and admire him. Many seem to know instinctively defeated at Bannockburn in 1314. Six years later, a group of Scottish

82 A Republic—If We Can Keep It something very fundamental to the greatness of their past and their distinction as a people: Their proudest heritage is one of keeping government at bay, not granting it broad power over their lives and livelihoods. As a Scot in America, that’s what I celebrate every chance I get. I hope someday the Scots of Scotland will do so once again as well. 19 —LWR, December 2010

Chapter Nineteen

Happy Birthday, Adam Smith!

The birthday of a great man just passed virtually unnoticed—even in his homeland—though he shaped the modern world perhaps as much as anybody. That man was Adam Smith, the world’s first economist. Smith was baptized on June 5, 1723, in Kirkcaldy, Scotland. It’s not known for certain, but presumed that he was either born on that very day, or a day or two before. Whichever date it was, he entered a world that his reason and eloquence would later transform. For 300 years before Smith, Western Europe was dominated by an economic system known as “mercantilism.” Though it provided for modest improvements in life and liberty over the feudalism that came before, it was a system rooted in error that stifled enterprise and treated individuals as pawns of the state. Mercantilist thinkers believed that the world’s wealth was a fixed pie, giving rise to endless conflict between nations. After all, if you think there’s only so much and you want more of it, you’ve got to take it from someone else. 83

84 A Republic—If We Can Keep It Happy Birthday, Adam Smith! 85

Mercantilists were economic nationalists. Foreign goods, they enhanced their value made for greater wealth and higher standards of thought, were sufficiently harmful to the domestic economy that living. The “pie” of national wealth isn’t fixed; you can bake a bigger one govern-ment policy should be marshaled to promote exports and by producing more. restrict imports. Instead of imported goods, they wanted exports to be Baking that bigger pie, Smith showed, results from investments in paid for by foreigners in gold and silver. To the mercantilist, the capital and the division of labor. His famous example of the specialized precious metals were the very definition of wealth, especially to the tasks in a pin factory demonstrated how the division of labor works to extent that they piled up in the coffers of the monarch. produce far more than if each of us acted in isolation to produce Because they had little sympathy for self-interest, the profit motive everything himself. It was a principle that Smith showed works for and the operation of prices, mercantilists wanted governments to nations precisely because it works for the individuals who make them bestow monopoly privileges upon a favored few. In Britain, the king up. He was consequently an economic internationalist, one who even granted a protected mo nopoly over the production of playing believes in the widest possible cooperation between peoples cards to a particular, highly-placed noble. irrespective of political boundaries. He was, in short, a consummate free Economics in the late 18th century was not yet a focused subject of trader at a time w hen trade was hampered by an endless roster of its own, but rather a poorly organized compartment of what was known counterproductive tariffs, quotas and prohibitions. as “moral philosophy.” Smith’s first of two books, The Theory of Moral Smith wasn’t hung up on the old mercantilist fallacy that more Sentiments, was published in 1759 when he held the chair of moral goods should be exported than imported. He exploded this “balance of philosophy at Glasgow University. He was the first moral philosopher to trade” fallacy by arguing that since goods and services constituted a recognize that the business of enterprise—and all the motives and nation’s wealth, i t made no sense fo r government to make sure that actions in the marketplace that give rise to it—was deserving of careful, more left the country than came in. full-time study as a modern discipline of social science. The culmination Self-interest, frowned upon for ages as acquisitive, anti-social of his thoughts in this regard came in 1776. As American colonists were behavior, was celebrated by Smith as an indispensable spur to declaring their independence from Britain, Smith was publishing his economic progress. “It is not from the benevolence of the butcher, the own shot heard round the world, An Inquiry into the Nature and Causes brewer, or the baker, that we can expect our dinner,” he wrote, “but of the Wealth of Nations, better known ever since as simply The Wealth from their regard to their own interest.” Moreover, self-interest was an of Nations. unsurpassed incentive: “The natural effort of every individual to better Smith’s choice of the longer title is revealing in itself. Note that he his own condition ... is so powerful, that it is alone, and without any didn’t set out to explore the nature and causes of the poverty of nations. assistance, not only capable of carrying on the society to wealth and Poverty, in his mind, was what happened when nothing happens, when prosperity, but of surmounting a hundred impertinent obstructions people are idle by choice or force, or when production is prevented or with which the folly of human laws too often encumbers its operations.” destroyed. He wanted to know what brings the things we call material In a free economy, he reasoned, no one can put a crown on his head wealth into being, and why. It was a searching examination that would and command that others provide him with goods. To satisfy his own make him a withering critic of the mercantilist order. desires, he must produce what others want at a price they can afford. Wealth was not gold and silver in Smith’s view. Precious metals, Prices send signals to producers so that they will know what to make though reliable as media of exchange and for their own industrial uses, more of and what to provide less of. It wasn’t necessary for the king to were no more than claims against the real thing. All of the gold and assign tasks and bestow monopolies to see that things get done. Prices silver in the world would leave one starving and freezing if they and profit would act as an “invisible hand” with far more efficiency than couldn’t be exchanged for food and clothing. Wealth to the world’s first any monarch or parliament. And competition would see to it that economist was plainly this: goods and services. Whatever increased the quality is improved and prices are kept low. supply and quality of goods and services, lowered their price or

86 A Republic—If We Can Keep It

Smith’s view of competition was undoubtedly shaped by the way he saw the universities of his day, loaded with coddled, tenured professors whose pay had little to do with their service to their pupils or the public at large. While a student at Oxford in the 1740s, he observed the lassitude of his professors who “had given up altogether even the 20 pretense of teaching.” If it seems that Smith put much more faith in people and markets than in kings and edicts, it’s because that’s precisely right. With characteristic eloquence, he declared that “. . .[I]n the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it.” Smith displayed an understanding of government that eclipses that of many citizens today when he wrote, “It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense . . . . They are themselves always, and without any exception, the greatest Chapter Twenty spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.” The Man Who Didn’t “Grow” In Office The ideas of Adam Smith exerted enormous influence before he died in 1790 and especially in the 19th century. America’s Founders were Seven miles north of Escanaba in Michigan’s Upper Peninsula sits a greatly affected by his insights. The Wealth of Nations became required little town with a very big name. More than a hundred years after the reading among men and women of ideas the world over. A tribute to death of the town’s namesake it’s unlikely that many of today’s 5,000 him more than any other individual, the world in 1900 was much freer residents of Gladstone could tell you much about him. But in the and more prosperous than anyone imagined in 1776. The march of free nineteenth century and for a long time thereafter, he was widely trade and globalization in our own time is further testimony to the considered to be one of the world’s greatest statesmen. enduring l egacy of Adam Smith. A think tank in Br i tain bears his name Gladstone, Michigan, wasn’t always so named. It was originally and seeks to make that legacy better known. christened “Minnewasca,” the Sioux Indian word for “White Water,” in Ideas really do matter. They can change the world. Adam Smith 1887. Shortly thereafter, a local businessman pushed to rename the proved that in spades, and we are all immeasurably better off because town after British Prime Minister William Ewart Gladstone. A nearby of the ideas he shattered and the ones he set in motion. railroad was partially funded by British capital and area residents appreciated the resulting economic development. —LWR, June 2006 Just who was this son of Scottish parents who read 20,000 books in his lifetime and could speak Greek, Latin, Italian, and French, in addition to English? Biographer Philip Magnus wrote that “at the time of his death [1898] he was . . . the most venerated and influential statesman in the world.” Another biographer (who currently sits in Britain’s House of

88 A Republic—If We Can Keep It A Man Who Didn’t “Grow” In Office 89

Lords), Roy Jenkins, declares that Gladstone “stamped the Victorian age measures. But it is undeniable that Britons were considerably freer even more than did [Queen] Victoria herself, and represented it almost when he died in 1898 than their fathers and grandfathers had been at as much.” the start of the century. No individual in history had a longer or more distinguished career It wasn’t the instruction he received while a student at Oxford that in the British government: 62 years in the House of Commons; in charge converted Gladstone to the liberation of the individual. Indeed, he of the nation’s finances as Chancellor of the Exchequer for 14 budgets in offered this observation in later years: “I trace in the education of four administrations; leader of a major political party (the Liberals) for Oxford of my own time one great defect. Perhaps it was my own fault; almost 40 years; four times prime minister, for a total of 12 years. but I must admit that I did not learn when at Oxford that which I have Gladstone was 84 years old when he retired as P.M. in 1894, the oldest learned since—namely, to set a due value on the imperishable and prime minister in British history. He was hailed as the “Grand Old Man” inestimable principles of human liberty. The temper which, I think, too for his leadership and stature and as “England’s Great Commoner” much prevailed in academic circles was to regard liberty with jealousy.” because he was not of royal blood and refused to accept any titles of Anyone familiar with the prevailing orthodoxy of today’s academia nobility. When he died, a qu arter million citi zens attended his funer al, would have to conclude that in this respect, the more things have one of the largest the country ever saw. changed the more they’ve stayed the same. What made Gladstone both great and memorable was what he It was as president of the Board of Trade in the ministry of Sir accomplished while he served in government. Biographer Magnus says Robert Peel in the 1840s that a young Gladstone came to champion free that Gladstone “achieved unparalleled success in his policy of setting trade. The disastrous Irish potato famine was a power f ul argument the individual free from a multitude of obsolete restrictions.” against laws forbidding the importation of grain for a starving populace. Today, when a citizen gets elected to make government smaller but Gladstone befriended the Anti-Corn Law League’s John Bright, ends up doing the opposite, the conventional wisdom credits him with became convinced of the logic of free trade, and secured the repeal of having “grown in office.” Gladstone’s philosophy evolved, but in the protectionist Corn Laws over the objections of many in his own precisely the opposite direction—from a hodgepodge of statist notions Conservative, or Tory, Party. The measure split the Conservatives, to principled liberty. He entered Parliament at age 22 in 1832 as a which paved the way for Gladstone and others a decade later to give protectionist, a defender of the tax-subsidized Church of England, and birth to the Liberal Party. an opponent of reform. The eminent British historian Thomas Gladstone’s conversion to free trade made him a big name in liberal Babington Macaulay described him as “the rising hope of the stern and circles in Britain and a rising star abroad as well. His international unbending Tories.” reputation soared in 1851 when, after a visit to Naples, he revealed to the world the appalling conditions in Neapolitan prisons. Reformers Ardent Free Trader there were being locked up for speaking out on behalf of freedom. Glad- stone’s vigorous denunciation reverberated around the globe and later By 1850 he had become an ardent free trader and by 1890 he was prompted the Italian patriot Garibaldi to credit the British largely responsible for reducing Britain’s tariffs from 1,200 to just 12. parliamentarian with having “sounded the first trumpet call of Italian He slashed government spending, taxes, and regulations. He ended tax liberty.” subsidies for the Church of England in Ireland. He pushed through reforms that allowed Jews and Catholics to serve in Parliament and that In foreign policy, with a painful exception or two that he mostly extended the vote to millions of taxpaying workers. He extolled the later regretted, Gladstone practiced retrenchment. He opposed the virtues of self-help and private charity. imperialist policies of his arch-rival Benjamin Disraeli. He said he preferred the Golden Rule over intervention. He fought hard but failed Gladstone’s administrations were not paragons of unqualified liber- to secure Home Rule for Ireland; if Parliament had been as wise as he on tarianism. In domestic policy he sometimes supported interventionist that issue, Ireland today might still be a part of the United Kingdom.

90 A Republic—If We Can Keep It

In February 1893, in his 83rd year, he delivered what one biographer terms “a lucid and brilliant speech” upholding the sanctity of sound money and the gold standard. Gladstone often urged the British people to look to the ideas of America’s Founding Fathers for inspiration. “I was brought up to 21 distrust and dislike liberty; I learned to believe in it,” he told a friend in 1891. “I view with the greatest alarm the progress of socialism at the present day,” he said. “Whatever influence I possess will be used in the direction of stopping it.” Today, in little Gladstone, Michigan, a portrait of the Grand Old Man hangs in City Hall. The residents there can and should be very proud that their town’s name didn’t stay “Minnewasca” for long. —LWR, April 2002

Chapter Twenty-One

Prophets of Property

In 1800, fewer than 1 million people lived in London; a century later, it was home to well over 6 million. As the 20th century dawned, London had already been the most populous city on the planet for seven decades. Britain’s population as a whole soared from 8 million in 1800 to 40 million in 1900. In the previous 2,000 years, even a fraction of such population growth a n ywhere in Europe was usually nipped in the bud by famine, disease, falling incomes and population retrenchment. But Britain in the 19th century was a special place, the legendary “workshop of the world.” London had become the capital of capital, with private investment in agriculture and manufacturing burgeoning at a record-breaking pace in the latter half of the century. The year Victoria ascended to the throne, 1837, saw fewer than 300 patent applications for new inventions, but by the end of the century the number exceeded 25,000 annually. Per capita income on the eve of World War I was three times what it was a century before and life expectancy had risen by 25 percent. There were many more mouths to feed and bodies to clothe, but British entrepreneurship was feeding and clothing them better than

92 A Republic—If We Can Keep It Prophets of Property 93 the world had ever e xperienced. It was the great est flowering of Wemyss and his friends rounded up spokespersons and financial problem-solving creativity, ingenuity, and innovation in history. support. They enlisted writers and public speakers. They published and Colin Pullinger, a carpenter’s son from Selsea, typified the 19th circulated essays and leaflets. The organization operated as an activist century British entrepreneur. He designed a “perpetual mousetrap” that think tank with a lobbying arm. The League attempted to mobilize could humanely catch a couple dozen mice per trap in a single night, public opinion against specific bills, functioning as a “day-to-day and then sold 2 million of them. Perhaps Emerson had Pullinger in mind legislative watchdog” in the view of historian Edward Bristow. It even when he famously wrote, “If a man write a better book, preach a better arranged testimony before parliamentary hearings. One League sermon, or make a better mousetrap than his neighbour, tho’ he build pamphlet attacked the introduction of “grandmotherly legislation” as a his house in the woods, the world will make a beaten path to his door.” transgression against the freedom of contract. Armed with arguments provided by League members and sympathizers, Wemyss’ allies in As the 1800s drew to a close, the framework that made possible Parliament killed hundreds of interventionist bills i n the 1880s and these extraordinary achievements—capitalism—fell under assault. As 1890s. poverty declined massively for the first time, the very presence of the poverty that remained prompted impatient calls for forcible Opponents often accused the League of being motivated by its redistribution of wealth. Around the world, Marxists painted capitalists members’ bottom line drive for profits, but in actuality its philosophical as exploiters and monopolists. In Britain, Charles Kingsley argued that ideals were paramount. Among its members were some of the brightest Christianity demanded a socialist order, and the Fabian Society was intellects of the era, Herbert Spencer being perhaps the most notable. formed to help bring it about. Many unscrupulous businessmen turned Author of the libertarian classic, “The Man Versus the State,” Spencer to the state for favors and protections unavailable to them in was the best-selling philosopher of his day and was nominated for a competitive markets. Would anyone come to the defense of the Nobel in literature. Spencer saw liberty as the absence of coercion and capitalism with as much vigor and passion as those who opposed it? as the most indispensable prerequisite for human progress. The ownership of property was an individual right that could not be morally At least one group did: the Liberty and Property Defence League. infringed unless an individual first threatened the property of another. Though its work has been largely forgotten, what the world learned Spencer has been demonized as an apostle of a heartless “survival of the about socialism in the following century surely vindicates its message. fittest” Darwinism by those who choose to ignore or distort his central Its name derived from the members’ belief that liberty and property message, namely that individual self-improvement can accomplish were inseparable and that unless successfully defended, both could be more progress than political action. One creates wealth, the other swept away by the beguiling temptations of a coercive state. merely takes and reapportions it. The founder of the League in 1882 was a pugnacious Scot by the Auberon Herbert was a Spencer acolyte whose championship of name of Lord Elcho, later the 10th earl of Wemyss as a member of the voluntarism found fertile soil among fellow League members. His now House of Lords and thereafter known simply as “Wemyss.” Originally century-old warning about the danger of state intervention is positively elected to parliament in 1841 as a protectionist Tory, he eventually prophetic: “No amount of state education will make a really intelligent embraced free trade and repeal of the Corn Laws by 1846. He later nation; no amount of Poor Laws will place a nation above want; no evolved into a full-throated advocate for what we today would call amount of Factory Acts will make us better parents . . . . To have our “classical liberal” ideas. At the organization’s third annual meeting in wants supplied from without by a huge state machinery, to be regulated 1885, he expressed his hope that its efforts to educate the public would and inspected by great armies of officials, who are themselves slaves to “cause such a flood as will sweep away, in the course of time, all the system which they administer, will in the long run teach us nothing, attempts at state interference in the business transactions of life in the (and) will profit us nothing.” case of every Briton of every class . . . . No nation can prosper with undue state interference, and unless its people are allowed to manage In a 1975 essay in The Historical Journal from Cambridge University their own affairs in their own way. . . .” Press, historian Bristow contended that the Liberty and Property

94 A Republic—If We Can Keep It

Defence League changed the language in one important, lasting way. Prior to the 1880s, “individualism” was a term of opprobrium in most quarters, referring to “the atomism and selfishness of liberal society.” The League appropriated the word and elevated its general meaning to one of respect for the rights and uniqueness of each person. 22 But was the League successful in its mission to thwart the socialist impulse? In the short run, lamentably, no. By 1914, socialists had convinced large numbers of Britons that they could (and should) vote themselves a share of other people’s property. Two world wars and a depression in between seemed to cement the socialists’ claim that their vision for society was inevitable. Good ideas, however, have a way of resisting attempts to quash them. Bad ideas sooner or later fail and teach a valuable lesson or two in the process. Britain and most of the world gave socialism in all its varieties one hell of a run in the 20th century. The disastrous results now widely acknowledged underscore the warnings of those who said that we could depart from liberty and property only at our peril. Chapter Twenty-Two The warriors of the Liberty and Property Defence League may have lost the battle in their lifetimes, but a hundred years later they offer Wilfrid Laurier: A Canadian Statesman prophetic wisdom to those who will listen. —LWR, July 2007 Owing to where most Americans trace their ancestry from, we tend to know more European history than the history of our immediate neighbors to the north and south, Canada and Mexico. We can name famous entrepreneurs and political leaders from across the sea but rarely one from right next door. Not too long ago in a casual dinner conversation with Canadian liber-tarians in Vancouver, I named the better presidents and prime ministers, respectively, of the United States and Great Britain. It suddenly occurred to me that I couldn’t name a single Canadian counterpart. So I asked my dinner friends, “Among Canada’s political leaders, did you ever have a Grover Clevel and or a William Ewert Gladstone, a prime minister who believed in liberty and defended it?” One name emerged, almost in unison: Sir Wilfrid Laurier. Embar- rassed by my ignorance, I had to admit I had never heard of him. Never mind that he’s the guy with the bushy hair on the Canadian five-dollar bill; I just never noticed. Now that I’ve done a little research, I’m a fan. 95

96 A Republic—If We Can Keep It Wilfrid Laurier: A Canadian Statesman 97

Laurier’s political resume is impressive: fourth-longest-serving cultures of Canada. As prime minister he worked to keep the country prime minister in Canada’s history (1896–1911, the longest unbroken together by keeping the central government small. Toleration and term of office of all 22 PMs). Forty-five years in the House of Commons, decentralized federalism became hallmarks of his long legacy in politics. an all-time record. Longest-serving leader of any Canadian political party (almost 32 years). Across Canada to this day, he is widely regarded as one of the country’s greatest statesmen. Relying on Markets It’s not his tenure in government that makes Laurier an admirable To help Canadians compete with the colossus to the south, Laurier figure. It’s what he stood for while he was there. He really meant it hoped the country would rely on private enterprise and open markets. when he declared, “Canada is free and freedom is its nationality” and A key ingredient, he believed, would have to be a lower cost of “Nothing will prevent me from continuing my task of preserving at all government and a lower tax burden in Canada than in the United States. cost our civil liberty.” He made it clear, in the words of Crowley, Clemens, and Veldhuis, “that people who came to Canada from south of the border or beyond the A think tank in Ottawa now honors Laurier and another Canadian seas would find in the Dominion a society of free men and women PM, John MacDonald, in its name: the MacDonald-Laurier Institute. where everyone was expected to work hard, and where, if they did so, Founders Brian Crowley, Jason Clemens, and Niels Veldhuis authored a they would k eep more of the frui t s of the i r labours than any w here else, book, The Canadian Century: Moving Out of America’s Shadow, in which including the United States of America.” they explain the political principles and institutions the great Laurier stood for: limited government, light taxes, fiscal discipline, free trade, Laurier never achieved the degree of free trade his conscience private property, and the rule of law. supported, but against powerful opposition he pushed Canada away from high protectionist tariffs. He wanted lower duties aimed more to At a time when others in the British Commonwealth had begun to raise revenue than to favor certain industries or regions at the expense emulate the welfare-state policies o f Bismarckian G erm any, Lau rier had of others. He made progress on some other fronts as well. He proposed a better idea. Crowley, Clemens, and Veldhuis write: balanced budgets as a way to keep Canada’s debt low and manageable. Laurier’s objection to such schemes, like that of his Liberal His policies opened the door for an explosion of immigration. Half a colleagues, was one of principle: when people were expected to take million hard-working immigrants rushed to Canada during his tenure, responsibility for themselves and their famil[ies], they made better building a strong economy and a melting pot of countless cultures in the provision for their needs and directed their productive efforts process. where they would do the country and themselves the greatest good. Laurier’s record was not perfect from a libertarian perspective. For When this natural necessity to strive was diluted by an easy access example, he supported subsidies to transcontinental railroads, a major to the public purse, the ever-present danger was of the enervation departure from his otherwise pro-enterprise, limited-government of the individual and the stagnation of the progress of society. “If philosophy. But as twentieth-century Canadian prime ministers go, he you remove the incentives of ambition and emulation from public clearly stands apart and above. My friends in Vancouver don’t believe enterprises”—by which he meant the economic undertakings of any PM since Laurier did as much for liberty as he did. individuals and businesses, not state enterprises—Laurier said on the sbjectu in 1907, “you suppress progress, you condemn the I now keep a Canadian five-dollar bill in my wallet just for those community to stagnation and immobility.” occasions when I meet a Canadian and the conversation turns to politics. We will lament the caliber of more recent politicians on both Born in Quebec in 1841, Laurier rose in popularity in spite of his sides of the border but at least I can now point to Laurier’s picture and expressed belief in the separation of church and state. The province’s say, “We can do better, and indeed, you have.” Roman Catholic bishops urged voters to steer clear of him but he built a firm base of local support. The people appreciated his solid character —LWR, November 2010 and his desire for goodwill and conciliation among the disparate

Chapter Twenty-Three

From Crystal Palace to White Ele phant in 1 5 0 Years

Mention the ill-fated Millennium Dome to almost any citizen of Great Britain and you’ll get an earful about one of the greatest government sponsored, scandal-ridden fiascoes of all time. Costing more than a billion dollars, it was a white elephant that bled red ink from its public opening on New Year’s Day 2000 until it closed a year later. It was intended in part t o rival a famous project of a century and a half earlier but, by any important measure, it never came close. The Millennium Dome’s colossal flop prompted Prime Minister Tony Blair to remark, “If I had my time again, I would have listened to those who said governments shouldn’t try to run big visitor attractions.” Two years before, Blair and his whiz kids in the London bureaucracy thought there was nothing about the Great Exhibition of 1851 that couldn’t be improved with a generous dose of modern central planning and loot from the taxpayer. How wrong they were. If the Dome sparks renewed interest in that earlier show, it will serve perhaps its most useful purpose. What happened in 1851 was a spectacular tribute to the enterprising spirit of that day.

99 100 A Republic—If We Can Keep It From Crystal Palace to White Elephant in 150 Years 101

By the middle of the nineteenth century, Britain was the industrial like it in all the world. Michael Leapman, author of The World for a “workshop of the world,” producing more than half of all coal, iron, and Shilling: How the Great Exhibition of 1851 Shaped a Nation, calls it “the cotton cloth. Powered by a relatively free economy that was becoming first mass spectacle that appealed to almost every social class.” freer by the decade, Britain’s railroads, factories, and machine For a visitor to give every exhibit the attention it deserved would technology were well ahead of any other nation’s. It was time to have required 200 hours in the building, according to London’s most celebrate not only Britain’s remarkable achievements, but also those of famous newspaper of the day, The Times. There were the huge and free trade and free enterprise the world over. Around the mid-1840s, fabulous Koh-i-Noor diamond from India; a 40-foot scale model of the these thoughts came to animate Queen Victoria’s husband, Albert, the Liverpool docks, complete with 1,600 meticulously accurate miniature Prince Consort. ships; sophisticated threshing machines and other labor-saving farm Albert and his advisers felt that Britain should host a fair to equipment; a knife with 1,851 blades; exotic fabrics and furnishings, showcase the industrial might of all nations. Like so many people of the looms, sewing machines, and even a prototype submarine; gas cookery, time, they were ecstatic about the potential of capitalist invention and electric clocks, and one of the earliest versions of a washing machine. the peaceful, international trade it fostered. In January 1850, Victoria named Albert to head a 24-man Royal Commission to make the “Great Exhibition of the Industries of All Nations” a reality. The Latest from America Prince Albert declared at the start of the commission’s deliberations The wide array of displays representing the very latest of industry that the Exhibition should not and would not be funded by government. from America included a set of unpickable locks, a model of Niagara This was to be a celebration of private enterprise, and it seemed only Falls, a 16,400-pound lump of zinc, a McCormick reaper, a Colt revolver, logical for private, enterprising citizens to foot the bill. Everything from and, in Leapman’s words, “a piano that could be played by four people the building that would house it to the exhibits themselves would be at once and a violin and piano joied n in such a way that a single paid for by voluntary contributions, fundraising campaigns, and musician could play them both at the same time on a single keyboard.” admission fees. The Millennium Dome of 2000, by contrast, was a giant The Exhibition itself gave birth to new inventions. One of many public works scheme from its inception—filled with uninspiring, examples was provided by George Jennings, a sanitary engineer. His politically correct, and just plain boring displays and financed b y taxes ingenious flush toilets and decorative, space-saving urinals prevented a and the government’s national lottery. potential health hazard. They sparked so much public interest and As soon as London’s Hyde Park was chosen for the 1851 site, the fascination that his designs were subsequently copied in cities around Royal Commission solicited proposals for a building to house the the world. Exhibition during the expected six months it would be open to the Some of Britain’s best known businesses can trace their origins to public. The project was in danger of foundering amid designs deemed the Great Exhibition. Thomas Cook, the firm that today boasts more too costly, when entrepreneur Joseph Paxton came forth with plans for than 4,000 affiliated travel agencies around the world, got its start when a monster edifice made entirely of glass panes (nearly a quarter million its namesake began offering low-price excursion packages to get people of them) and the supporting iron framework. Thanks to the repeal in from all corners of Britain to the Palace in Hyde Park. The big profits 1845 of Britain’s longstanding and onerous “window tax,” the price of Charles Harrod earned serving visitors in his modest grocery store glass had fallen by 80 percent, making Paxton’s design affordable. proved to be the capital he needed to create one of the most famous When the “Crystal Palace” opened its doors on May 1, 1851, the department stores in the world. sheer immensity of it made for a grand show all by itself: 1,851 feet long When the Exhibition closed its doors on October 18 after five and a (a dimension intended to fit the year), 408 feet wide, and 108 feet high half months, more than six million people had come through it—almost at the entrance. It was built to accommodate as many as 60,000 people the same number who visited the Millennium Dome over a 12-month at one time, in addition to nearly 14,000 exhibits. There was nothing period 150 years later. Factor in the time-consuming difficulties of

102 A Republic—If We Can Keep It transportation in 1851 compared to the ease and speed of the space age and the contrast is all the more stunning. And unlike the Dome of 2000, the unsubsidized Crystal Palace of 1851 produced a financial surplus.

Tony Blair was right. He should have listened to those who warned Part IV that government has enough trouble doing what it’s supposed to do, that it doesn’t need to do what it shouldn’t. —LWR, March 2003

The Positive Power of the Entrepreneur

Chapter Twenty-Four

From Kleenex to Zippers: The Unpredictable Results of Entrepreneurs

The 1920s taught us many lessons in economics—perhaps foremost among them is that cutting tax rates encouraged entrepreneurs to invest in a variety of revolutionary products, from radios to refrigerators. A corollary lesson, however, is also important: When entrepreneurs are turned loose and their property rights are protected, what they eventually produce can’t be predicted—even by them. I want to describe four products that became p art of American life in the 1920s— Kleenex tissues, the zipper, air conditioning, and Scotch tape. Kimberly-Clark developed the material in Kleenex tissues from wood pulp in World War I as a substitute for cotton, which was in short supply. Originally called cellucotton, it was first used in wadded form as a surgical dressing. Later in the war, in its modern tissue form, it was used as a filter in gas masks. After the war Kimberly-Clark had large supplies of cellucotton on hand and the company searched for years for new uses for their 105

106 A Republic—If We Can Keep It From Kleenex to Zippers: The Unpredictable Results of Entrepreneurs 107 product. Finally, in 1924 the cellucotton became Kleenex tissues. The When Carrier developed a system of air flows to dehumidify the marketing staff at Kimberly-Clark believed the tissues had a niche print room, he ended up cooling the room as well. He had solved the market for removing cold cream and other cosmetics. Endorsements newspaper issue, but was fascinated with the broader implications of from Hollywood stars such as Helen Hayes and Gertrude Lawrence producing “air conditioning” to cool and clean the air in stuffy buildings. promoted Kleenex as soft and efficient for cleaning their faces. His employers did not share his vision, and Carrier left to start his own Fortunately for Kimberly-Clark, their marketers were wise enough company in 1914. His air-conditioning units were huge, cumbersome, to read their mail, and expand their market. Many letters from and expensive, but he sold enough to acquire the capital to keep customers asked,“Why don’t you ever say it’s good for blowing your improving the product. nose?” That led the company to do test-marketing—and yes, indeed, Carrier’s big breakthrough came in the expanding movie industry. more customers preferred Kleenex tissues to handkerchiefs. In fact, the Most theaters closed down in the summer because the heat and company now boasted that tissues were healthier because they were stuffiness made patrons focus more on waving fans than watching the disposable. “Don’t put a cold in your pocket” was the theme of the next screen. In 1925 the Rivoli Theatre owners in Manhattan decided to wave of advertising. In 1929 Kimberly-Clark introduced the pop-up box. install air conditioning to attract moviegoers in the summer. The Sales grew further and were even strong during the Great Depression of patrons were enthusiastic; many were more excited over what was the 1930s. happening in the air than in the movie. By 1930 Carrier was supplying The zipper, like Kleenex tissues, had a variety of uses in its early air conditioning to over 300 theaters in America. Factories soon years. Perhaps what is most surprising about the zipper, however, is followed, a nd finally, after World War II, Carrier was able to make home that someone ever thought it up at all. The U.S. patent office was air conditioning units affordable and popular. stunned by the product and hardly knew how to classify it. Scotch tape was developed in connection with painting of cars. By Originally known as a “slide fastener,” the zipper was first used on the 1920s Henry Ford’s all-black Model-Ts were out of fashion. shoes. In 1914 one of its promoters, Gideon Sundback, finally produced Improved lacquers and automatic spray guns allowed automakers to a zipper that would consistently work. He called it “hookless no. 2” and give customers more appealing two-tone cars. Scotch tape, two inches during World War I sold several thousand for use on money belts for wide, was invented by Minnesota Mining and Manufacturing (3M) to sailors. Sundback also sold some to the Navy for a “flying suit” it was give the clear sharp edge where the two paint tones met. Before long, developing. Garment manufacturers and tailors, however, preferred 3M was selling dozens of different types of Scotch tape for a variety of buttons and shunned the zipper. sealing purposes. Finally, in 1923 B. F. Goodrich took a chance and bought 150,000 hookless slide fasteners for its rubber galoshes. The company called No Obvious Mass Market their galoshes “Zipper Boots,” and the name stuck. Only after that These inventions had no obvious mass use or market when they success did the textile industry explore the larger market for zippers on were developed. Entrepreneurs had to invest energy and talent to clothing. figure out how best to sell their products, and ultimately consumers The market for air conditioning seems obvious now, but it was not decided that Kleenex tissues were best marketed as disposable so at the beginning of the 1920s. Willis Carrier, its inventor, worked on handkerchiefs, zippers as clothes fasteners, Scotch tape for household air conditioning as a sideline at his job with the Buffalo Forge Co. in New sealing, and air conditioning for home cooling. The common uses for York. Carrier was assigned to help a publisher in Brooklyn figure out these products seem obvious now, but that was not so in 1920. Trial how to stabilize the humidity in the printing room. Pages of newsprint and error, unexpected consumer interest, and sometimes desperation expanded and contracted when the humidity rose and fell, and ink dried were part of developing these now popular, and seemingly at different rates when the humidity changed. indispensable, products. No planning board could ever have invented these products, much less figured out how to market them. Even their

108 A Republic—If We Can Keep It inventors were often mystified by the direction of consumer interest in them. Perhaps we should not be surprised that so many new products of the 1920s were created for one purpose and ultimately marketed for another. Two inventions of the previous generation also fit this pattern. 25 Josephine G. Cochrane, the daughter of a civil engineer, invented the dishwasher in the 1880s to protect her valuable china from being broken during washing by careless servants. Even when the sanitary value of a dishwasher was realized, its next market was large-scale cleaning for hotels. Popular home use didn’t come until the 1 950s, almost 70 years after it was invented. Melville Bissell invented the carpet sweeper in the 1870s, not to market commercially, but simply to help his wife clean the floor of sawdust from packaging in her crockery shop. He and his wife only thought of marketing their sweepers when customers were more fascinated by the cleaning of the shop than by the cups and dishes being sold there. Chapter Twenty-Five Entrepreneurship is a strange and unpredictable process. We need it, and our lives have been improved by it. We must have strong A Camera Reaches 100 property rights to sustain it. But what entrepreneurs will produce, and the marketing route they will take, will probably remain as strange and circuitous as it was in the 1920s. This month marks a centennial anniversary that deserves to be noted. It was 100 years ago, in February 1900, that George Eastman —BWF, December 2005 first intro-duced the Kodak Brownie box camera. The price tag was one dollar; film sold for 15 cents a roll. Eastman was about to do for cameras what Steven Jobs would do for computers almost eight decades later. For the first time, taking pictures was within the reach of almost every American family. Whether you’re a camera buff or not, you probably have seen and perhaps have even used a Brownie. Nowadays, they show up at rummage sales and antique shows, but I can remember when they were still widely used in my childhood days during the 1950s. They were simple to operate and took great pictures. The Brownie not only ushered in the era of modern photography; it was also a genuine cultural phenomenon in America. Millions were sold. Thousands of American youngsters signed up as members of The Brownie Camera Club and entered Kodak photo contests. Men and women who went on to become famous photographers got their start with Eastman’s little invention. 109 110 A Republic—If We Can Keep It A Camera Reaches 100 111

Student of Photography Praise from the Pros The man who gave us the Brownie camera was no stranger to Professional photographers praised the pioneering work of photography in 1900. In the 1870s, when Eastman was in his twenties Eastman. They called his prints and negatives “the best dry plate work and picture-taking wasn’t much older, what would become the passion on the market.” Journals and newspapers began publishing articles of his life started out as a hobby. In 1871 at the age of 17, he bought about his inventions. In 1929, when Eastman met Thomas Edison for almost a hundred dollars’ worth of photographic equipment and hired a the first time, each of the elderly men revealed they had purchased a photographer to instruct him in the art. He read everything he could product made by the other as early as the 1880s. “Pretty good film,” find on the subject and with a backpack and a wheelbarrow, he hauled Edison told Eastman. his equipment everywhere he wanted to capture an image. By 1888, Eastman had simplified the camera into a small, easily held Cameras in the 1870s were as big as microwave ovens. The tools of box measuring three and three-quarter inches high, three and a quarter the professional photographer’s trade—including a bulky, unreliable inches wide, and six and a half inches long. He needed a name for it, a camera, a tripod, and various liquid chemicals—were more than a catchy trademark that could be easily pronounced and spelled. “K” was single man could carry, “a pack-horse load,” as Eastman described it. He his favorite letter because, he said, it was “a strong, incisive sort of resolved to downsize, simplify, and reduce the cost of the “burden” of letter.” After toying with various combinations of letters, he hit on one taking pictures. that rang some sort of internal bell in his mind, “Kodak.” But the first Though he lived his entire life in the area where he was born— Kodak camera, priced at $25 when it debuted in 1888, was still upstate New York—Eastman traveled widely. He once visited unaffordable for most Americans. Michigan’s Mackinac Island, where he set up his camera equipment to Eastman and his team of expert craftsmen worked feverishly to cut take photos of the natural bridge, a stone landmark. A crowd of gawking costs and improve quality. The result was a camera that would reach tourists gathered, assuming Eastman would take their pictures and people, in Eastman’s words, “the same way the bicycle has reached offer the photos for sale. When he informed them he was making them”—the Kodak Brownie. It took the world by storm. The first run of pictures for his own purposes and not for sale, a disappointed tourist 5,000 cameras flew off the shelves and orders piled up at an amazing chewed him out: “Then why did you let us stand in the hot sun for a full pace that exceeded the most optimistic projections. Even corner half-hour wh ile you fooled around with your contraptions! You ought to drugstores were selling them. wear a sign saying that you are an amateur!” A new term was coined during a 1905 trial to describe the millions Eastman experimented endlessly and discovered new techniques of people caught up in the craze: “Kodak freaks.” In her biography of and processes for producing better film and lighter, less expensive George Eastman, Elizabeth Bayer quotes the court transcript, which cameras. A self-taught chemist, he ended the era of sloppy, wet-plate read, “Wherever they go, and whomever they see, and whatever place photography by inventing a process that used dry chemicals, though not they have come to, they have got to have a Kodak along for the purpose without many disappointments. His Eastman Dry Plate Company almost of getting pictures.” In 1904, reports Bayer, w hen the Dalai Lama fled went bankrupt in the 1880s, in spite of his hard work and sleepless from his Tibetan palace, he took his Brownie with him. nights. But in America’s golden age of invention, when taxes were low Eastman inspired great loyalty among his employees, in large and rewards for persistence were often great, this genius who had measure because of what biographer Bayer notes were “his countless dropped out of school at the age of 13 went on to build an acts of kindness, his enlightened personnel policies, and his tireless extraordinarily successful business. working habits.” He was an American original—a self-made man whose dreams and commitment have made the everyday lives of generations of people happier by allowing moments of those lives to be captured on film.

112 A Republic—If We Can Keep It

The estimated 70 billion pictures Americans alone will take this year are the direct descendants of the Kodak Brownie, the first mass-produced camera in history. Its creator was a superb businessman as well as a talented inventor, and became one of America’s wealthiest citizens. He gave away more than $100 million to universities and charities before his 26 death in 1932. If, as the saying goes, one picture is worth a thousand words, then the story of George Eastman and the Kodak Brownie is worth 70 trillion words. —LWR, February 2000

Chapter Twenty-Six

Charles Schwab and the Steel Industry

When asked for the secret of his success in the steel industry, Charles Schwab (1862–1939) always talked about making the most with what you have, using praise, not criticism, giving liberal bonuses for work well done, and “appeal[ing] to the American spirit of conquest in my men, the spirit of doing things better than anyone has ever done them before.”He likd e to tellthis story about how he h andled an unproductive steel mill: I had a mill manager who was finely educated, thoroughly capable and master of every detail of the business. But he seemed unable to inspire his men to do their best. “How is it that a man as able as you,” I asked him one day, “cannot make this mill turn out what it should?” “I don’t know,” he replied. “I have coaxed the men; I have pushed them, I have sworn at them. I have done everything in my power. Yet they will not produce.” It was near the end of the day; in a few minutes the night force would come on duty. I turned to a workman who was standing

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beside one of the red-mouthed furnaces and asked him for a piece of Steel. Jones offered Schwab a job as a stake driver for the engineering chalk. corps who designed plans for building furnaces. Schwab accepted, “How many heats has your shift made today?” I queried. proved himself capable, and soon became a draftsman. Here, he worked overtime to master his craft; within six months he became Jones’ right- “Six,” he replied. hand man at the mill. As Jones’ messenger boy, Schwab came into I chalked a big “6” on the floor, and then passed along without contact with the mill owner, the Scottish immigrant Andrew Carnegie. another word. When the night shift came in they saw the “6” and Carnegie took a special liking to Schwab, who wisely spent some of his asked about it. off hours playing Scottish ballads on Carnegie’s piano. “The big boss was in here today,” said the day men. “He asked us Schwab worked hard to please Jones and Carnegie. Doing so how many heats we had made, and we told him six. He chalked it allowed him to advance in the Carnegie organization. Fortunately for down.” Schwab, Carnegie did not recruit his leaders on the basis of wealth or family standing. He used a merit system; he wanted people who could The next morning I passed through the same mill. I saw that the make the best steel possible at the lowest price. To succeed under “6” had been rubbed out and a big “7” written instead. The night Carnegie’s system, Schwab would have to master the methods of steel shift had announced itself. That night I went back. The “7” had been production. erased, and a “10” swaggered in its place. The day force recognized no superiors. Thus a fine competition was started, and it went on until this mill, formerly the poorest producer, was turning out more The Carnegie System than any other mill in the pla nt. (Charles M. Schwab, Succeeding with What You Have [New York: Century Co., 1917], pp. 39–41) Carnegie stressed cutting costs: in fact his motto was “Watch the costs and the profits will take care of themselves.” This meant hard Schwab showed the ability to find solutions to problems even as a work in innovating, accounting, and managing. Purchases, for example, lad growing up in Loretto, Pennsylvania. According to one of his were made in bulk to achieve economies of scale. Also, Carnegie strived teachers, “Charlie was a boy who never said, ‘I don’t know.’ He went on for vertical integration, the control of his steel business from the buying the principle of pretend that you know and if you don’t, find out mighty of raw m aterials to the marketing of finished steel. quick.” Schwab knew early that he would have to live by his wits; his parents and immigrant grandparents weaved and traded wool At the heart of Carnegie’s system were bonuses and partnerships products, jobs which put food on the table but not much money in the for those who excelled. Strong incentives were given employees who bank. Young Charlie, therefore, started work early in life. In one job he could figure out how to save on iron ore, coke, and limestone; or how to was a “singing cabby”: he drove passengers from nearby Cresson to produce a harder, cheaper steel; or how to capture new markets for Loretto and entertained them with ballads along the way. One of his steel. Carnegie explained that success “flows from having interested passengers, impressed with the gregarious youth, gave him a travel exceptional men in our service; thus only can we develop ability and book. Schwab later said, “It opened my eyes to the glories of the outside hold it in o u r ser v ice.” In fact, Carnegie said, “Every yera should be world, and stimulated my imagination tremendously.” Soon, Loretto, marked by the promotion of one or more of our young men.” Pennsylvania, population 300, would be too small to contain the Captain Jones had risen to mill superintendent this way. Among ambitious Schwab. With his parents’ blessing, he left home at age 17 to other things he had invented the Jones mixer, a device that cut costs in clerk in a general store in Braddock, a suburb of Pittsburgh. the transferring of steel from the blast furnace to the Bessemer Braddock was a steel town, varied in its cultural and urban life. converter. For his inventions and know-how, Carnegie paid him the Working in the store, young Charlie often pleased customers with his highest salary in the business, $25,000—the same salary as that of the good looks, wit, and charm; one man whom he impressed was William President of the United States. “Captain Bill” Jones, the mill superintendent at Braddock for Carnegie

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Schwab rose through the ranks just as Jones did. He completed In the case of the Scrantons, Carnegie showed no mercy. When small tasks and was given larger ones. At age 23, he designed and built a Carnegie went into the steel business in 1872, he was told that he could bridge over the Baltimore and Ohio Railroad tracks; he saved time and never compete against the Lackawanna Company; Joseph Scranton was money doing the job and received as a bonus ten $20 gold pieces from a founding father of American rail-making; he had a generation of Carnegie himself. Other assignments followed: he installed meters in experience making rails. But that year Joseph Scranton died, and his the factories and reduced waste of natural gas; he redesigned a rail- sons William and Walter would be the ones to challenge Carnegie: first finishing department and saved 10 cents per ton of steel; he helped in with the Lackawanna Company, then with their Scranton Steel calming down workers during a violent strike in the Homestead plant. Company. Carnegie and the Scrantons joined the Bessemer Steel When Captain Jo nes died in a blast furnace explosion in 1889, Schwab Association in 1875, but their approaches were different: the Scrantons was the logical choice for superintendent at Braddock. wanted a pool, but Carnegie told them and others that unless he got the Gregarious and competent, Schwab became Carnegie’s problem largest share he would “withdraw from it and undersell you all in the solver. For example, the workers at Braddock were turning out market—and make good money doing it.” “seconds,” or substandard rails. Schwab’s solution: give $20 cash The Scrantons and the others were bluffed by Carnegie and gave bonuses to those steel-makers producing the fewest seconds. The him his way. Carnegie then studied the Scrantons and learned their quality of the rails shot up and the resulting increase in profits more strengths and weaknesses. He discovered that they (and others) were than paid the bonuses given. No wonder that Carnegie soon gave discarding the thin steel shavings, called “scale,” that fell on the floor Schwab a small partnership in Carnegie Steel, with the promise of more when the steel passed through the rollers. When he learned this, he to come if he could keep producing. Carnegie even wrote one of his regularly sent a man to Scranton to cart away tons of the Scrantons’ senior partners, Henry Clay Frick, that Schwab “gives every promise of scale, almost free of charge, and brought it to Pittsburgh to use in being the man we have long desired” eventually to run the business. making rails for Carnegie Steel. Schwab idolized Carnegie and found him amazing to watch. As Carnegie moved to the top of the American steel business, Carnegie’s efficiency and his thorough knowledge of the industry made Schwab watched, learned, and proved himself time and again. In 1897, him a terror among fellow steel producers. He spied on them, used their the 35-year-old Schwab became president of Carnegie Steel and the two annual reports against them, and even wrote them to secure men ran the company together. Business was never better. Schwab put information on costs of production. Meanwhile, Carnegie Steel was a in 16 new furnaces at the Homestead plant, and costs per ton of finished closed corporation; he told outsiders nothing of his costs or his future steel fell 34 per cent in one year. To promote espirit de corps, Schwab plans. Carnegie disdained “pools,” secret agreements among held Saturday meetings with all of his superintendents to work out competitors to divide up the market and keep prices high. Pools were problems. Meanwhile, the results of large-scale production took hold: for the weak; Carnegie wanted to “scoop the market [and] run the mills the cost of making rails fell from $28 to $11.50 per ton between 1880 full.” and 1900, but the profits from the larger volume of business went from Not that Carnegie didn’t use friendships and other means to help $2 million in 1888 to $4 million in 1894, to $40 million in 1900. Some him. In bidding on a large Union Pacific contract for rails, he may have people wondered if Carnegie Steel might soon capture the steel trade of outmaneuvered the veteran Scranton family. Joseph Scranton was a the entire world. director of the Union Pacific as well as president of the Lackawanna Such speculation was premature. The next year, at age 65, Carnegie Iron and Coal Company. But Carnegie had done a favor for Sidney retired and, with Schwab as his emissary, sold Carnegie Steel to J. P. Dillon, the president of the Union Pacific, and Dillon agreed to give Morgan for $480 million. Morgan then combined Carnegie Steel with Carnegie the contract if he would match the lowest bid. other companies to create U.S. Steel, the first billion-dollar company in American history. The choice for president of the company: Charles Schwab. Carnegie vs. the Scrantons

118 A Republic—If We Can Keep It Charles Schwab and the Steel Industry 119

Reporters and critics condemned “The Steel Trust,” as they called Schwab, the man who said, “I cannot fail,” seemed to have failed. He U.S. Steel, for its size and its potential to monopolize. Who would be able was depressed for months. Even Carnegie repudiated Schwab and this to compete, they asked, with such a large vertically integrated added to the pain. During his troubles he had insomnia, he lost weight, company? At his disposal, Schwab would have 213 steel mills and his arms and legs were regularly numb, and sometimes he fainted. His transportation companies, 41 iron ore mines, and 57,000 acres of coal wife forgave him for his adultery and this no doubt eased the strain; but land—enough, critics charged, to dwarf competitors and keep prices she was still not happy because she wanted a child of her own and high. never had one. She didn’t covet the extravagant life, so dear to her Schwab discovered, however, that he would not be able to use the husband, and she spent many lonely days at Riverside. Carnegie system at U.S. Steel. In fact, he would not have authority to run Schwab was out at U.S. Steel, but he already had the makings for a the company at all. Morgan and his friend Elbert Gary had organized comeback. When he was president of U.S. Steel, Schwab had bought U.S. Steel so that an executive committee, headed by Gary, and the board Bethlehem Steel as a private investment. He was criticized for this, of directors would set the policies of the company; Schwab, as espe-cially when he merged Bethlehem Steel with some unsound president, would carry them out. Morgan and Gary were interested in companies into an unprofitable shipbuilding trust. This merger business stability, not in innovating or in cutting the price of steel. For eventually col-lapsed; but when Schwab stepped down at U.S. Steel, he example, when Schwab wanted to secure more ore land, Gary said no. still had Bethlehem Steel as his own property. The demotion from being He also opposed price-cutting, aggressive marketing, giving bonuses, pres-ident of a company worth over one billion dollars, to being and adopt-ing new technology. Schwab later said, “Gary, who had no president of one worth less than nine million dollars would have real knowl-edge of the steel business, forever opposed me on some of embarrassed some men, but not Schwab. He would have full control in the methods and principles that I had seen worked out with Carnegie— running the company and would succeed or fail on his own abilities. methods that had made the Carnegie Company the most successful in Before Schwab took over Bethlehem Steel, its future had not looked the world.” promising. It had been founded in 1857 and soon produced rails for the Lehigh Valley Railroad. This was more than coincidence because Personal Problems entrepreneur Asa Packer, who had built the Lehigh Valley Railroad, held a large interest in what was then Bethlehem Iron. Packer, a Connecticut Schwab’s personal life, more than disputes over policy, seems to Yankee, had the vision and ability to promote both of these investments have led to his downfall at U.S. Steel. He showed he had the values of a and make them profitable. His rise from carpenter to railroad tycoon dissipater as well as those of an entrepreneur. When Carnegie was in had made him a legend in Pennsylvania; he was worth $17 million by control, Schwab consciously restrained his extravagant tastes; Carnegie the late 1870s. When he died in 1879, his sons, sons-in-law, and deplored living beyond one’s income, gambling, and adultery. But out nephews took over his investments, but did not have the success that from under Carnegie’s grip, Schwab engaged in all three and almost Packer did. The Lehigh Valley Railroad floundered and went into mined his marriage and his career. In New York City, Schwab built receivership in the Panic of 1893. Bethlehem Iron almost shared the “Riverside,” a gargantuan mansion, which consumed one whole block of same fate. the city and $7 million of his cash. He also gambled at Monte Carlo, which made bad newspaper copy and cost him credibility. Finally, he Led by Philadelphians and the Packer group, Bethlehem Iron had an affair with a nurse, which resulted in a child. Though Schwab hid became very conservative after Packer’s death. The younger leaders this from the press, he could not do so from his wife, Rana. The strain of singlemind-edly produced rails, even though Carnegie was doing it his adulterous behavior, combined with the pressure of Monte Carlo, cheaper, and they had the expense of importing most of their iron ore the expense of Riverside, and the barbs from Elbert Gary wrecked from Cuba. They es-caped a price squeeze in 1885 when, reluctantly, Schwab’s health. He went to Europe to recover and, in 1904, resigned as they shifted from making rafts to producing military ordnance, which president of U.S. Steel. commanded a higher price than rails. Such an imaginative strategy, as one might expect, did not originate within the Packer group; in fact,

120 A Republic—If We Can Keep It Charles Schwab and the Steel Industry 121 they resisted it until declining profits on rails presented them with no remarkable words, “I selected 15 young men right out of the mill and alternative. made them my partners.” Two of these “partners” were Eugene Grace, the son of a sea captain, and Archibald Johnston, a local Moravian. They later became presidents of Bethlehem Steel.

After reorganization, Schwab wanted to diversify his company and From Rails to Armor Plate challenge U.S. Steel. To do this, he began making rails and moving The wise, if belated, switch from rails to gun-forgings and armor Bethlehem Steel away from its dependence on government contracts. plate led to profits because Bethlehem Iron was the only bidder on its Schwab adopted open-hearth technology because it produced better first government contract for ordnance in 1887. Other contracts were rails than the Bessemer system did. As historian Robert Hessen notes: forthcoming and Bethlehem Iron “established a reputation for quality U.S. Steel, the nation’s largest rail producer, did not follow Schwab’s and reliability,” if not for aggressiveness and efficiency. Regarding the lead; it would have had to replace its Bessemer facilities with open last, its operations were so inefficient that the company in 1898 hired hearth equipment. Being a late starter, Bethlehem enjoyed a clear Frederick W. Taylor, master of scientific management, to suggest ways advantage: with no heavy investment in obsolete equipment to of improving worker productivity. Yet the Packer group soon became protect, it could adopt the newest and most efficient technological hostile to Taylor’s cost-cutting ideas. Of one suggestion to reduce the processes. (Steel Titan: The Life of Charles M. Schwab, Oxford number of workers handling raw materials, Taylor observed that the University Press, 1975], p. 169). owners “did not wish me, as they said, to depopulate South Bethlehem.” He further commented, “They owned all the houses in South Bethlehem Schwab’s reorganization of the Cuban ore mines also improved and the company stores and when they saw we [Taylor and his Bethlehem’s competitive position at the expense of U.S. Steel. assistants] were cutting the labor force down to about one-fourth, they Cuban ore was richer in iron and lower in phosphorus than was the did not want it.” They also rejected Taylor’s suggestions to standardize Mesabi range ore used by U.S. Steel. It also had another advantage: it job functions and give raises to key personnel. contained large amounts of nickel, so that Bethlehem could produce Surviving, then, on government contracts, Bethlehem Iron stumbled nickel steel at no extra cost. For a ton of iron Bethlehem’s cost was into the twentieth century—a profitable operation in spite of itself. In $4.31; U.S. Steel’s was $7.10. (Steel Titan: The Life of Charles M. the midst of this conservatism, Schwab came to Bethlehem in 1904 and Schwab, p. 171) boldly announced that he would “make the Bethlehem plant the Now that Schwab was running an efficient, diversified company he greatest armor plate and gun factory in the world.” Taking the helm, turned his attention to cutting costs. He reasoned that employees would Schwab “backed Bethlehem with every dollar I could borrow.” This work harder if they knew it would result directly in a raise. Therefore, backing included buying new branch plants and closing unprofitable he set up a bonus system for productive laborers, foremen, and ones, getting new contracts by selling aggressively, and reorganizing the managers throughout the company. As Schwab described it, “Do so company as Bethlehem Steel. Planning for the future, Schwab bought much and you get so much; do more and you get more—that is the large tracts of land for the company east of South Bethlehem. He also essence of the system.” At U.S. Steel, by contrast, Gary tied bonuses to bought or leased more ore land and mechanized the c o mpany’s Cuban the overall profitability of the company, not to individual performance. iron fields to spur production there. Under that system, Schwab noted, a worker could toil hard and Schwab’s entrepreneurship clashed with the Packer group’s creatively, but receive no reward. cautiousness right from the start. As one historian said, “Many of the veteran Bethlehem executives preferred the old, pre-Taylor and pre- Improvements in Structural Steel Schwab way.” Soon after arriving in South Bethlehem, Schwab ousted the inbred Packer group from authority. In the new president’s Schwab’s biggest move at Bethlehem was his challenge to U.S. Steel in the making of structural steel. Here he focused on an innovation in

122 A Republic—If We Can Keep It Charles Schwab and the Steel Industry 123 making the steel beams that went into bridges and skyscrapers. Schwab During World War I, Schwab’s abilities were needed by the U.S. had been listening to Edward Grey, who had the idea of making steel government. In April 1918, one year after America entered the war, beams directly from an ingot, as a single section, instead of riveting victory was uncertain. Delays in shipping cargo and troops from smaller beams together. Grey claimed that his invention provided “the America to Europe threatened the Allies with defeat. More ships were greatest possible strength with the least dead weight and at the lowest needed; but in the U.S. shipyards few ships were forthcoming. Within cost.” the Wilson administration some blamed the owners of the shipyards, The other steelmakers rejected Grey’s theory; but Schwab was others blamed the workers, still others blamed radical unions. In the eager to try it even though it would cost $5 million to design the plant, midst of this finger-pointing, Franklin K. Lane, the Secretary of build the mill, and pay Grey’s royalties. The problem was that the Commerce, posed a solution: “The President ought to send for Schwab experts were so skeptical that Schwab had trouble raising money. In and hand him a treasury warrant for a billion dollars and set him to fact he almost backed out, but then jumped back in with the statement: work building ships, with no government inspectors or supervisors or “If we are going bust, we will go bust big.” He staked his own money, accountants or auditors or other red tape to bother him. Let the and that of his company, on the Grey beam, but still he needed more. So President just put it up to Schwab’s patriotism and put Schwab on his Schwab buttonholed wealthy investors for large personal loans and honor. Nothing more is needed. Schwab will do the job.” then, through remarkable salesmanship, persuaded his major suppliers, the Lehigh Valley and the Reading Railroads, to give him credit on The Schwab Formula deliveries of the new steel. Schwab then aggressively recruited big contracts for the “Bethlehem beam”: the Chase National Bank and the That month Schwab became Director-General of the Emergency Metropolitan Life Insurance Company in New York were among them. Fleet Corporation for the U.S. government. In his investigation, he The experiment worked. This cheaper and more durable beam quickly discovered cases of laziness, incompetence, work slowdowns, and poor became Schwab’s greatest innovation and he captured a large share of coordination of the shipbuilding. As usual, though, Schwab said, “The the structural steel market from U.S. Steel. best place to succeed is where you are with what you have.” He quickly rearranged incentives: he eliminated the “cost-plus” system whereby Schwab’s actions had consequences for the American steel industry. shipyards were paid whatever it cost them to build ships plus a From 1905 to 1920, Bethlehem Steel’s labor force doubled every five percentage of that as a profit. Instead, Schwab tied profits to cost- years. By contrast, U.S. Steel often stagnated; one officer noted after cutting by paying a set price per ship. Cost overruns would be paid by Schwab left that “works standing idle have deteriorated . . . the men are the shipbuilders who would have to be efficient to make a profit. As disheartened and a certain amount of apathy exists.” By the 1920s, the usual, bonuses were part of the Schwab formula. He paid them, chagrined leaders at U.S. Steel secretly began making Bethlehem beams; sometimes out of his own pocket, toshipbuilders who exceeded as an official there observed, “The tonnage lost on account of production goals. competition with Bethlehem . . . is . . . ever increasing . . . we are obliged to sell at unusually low prices in order to compete.” Schwab discovered Schwab enjoyed being a showman, so he went to the shipyards their ploy, however, and forced U.S. Steel to pay him royalties. himself: he rallied the workers, praised the owners, and even drew applause in a speech to the Industrial Workers of the World, a radical Schwab had transformed Bethlehem Steel. Even before World War I union. Never one to ignore symbols for achievement, Schwab had Rear his company had become the second largest steelmaker in America. The Admiral F. F. Fletcher head a group to award flags and medals to plants New York Times praised Bethlehem Steel as “possibly the most efficient, and workers whose work had been outstanding. By the fall of 1918, profitable self-contained steel plant in the country.” By 1920, it ships were being completed on time and even ahead of schedule. employed 20,000 people in the Lehigh Valley and was among the largest President Wilson and the leaders of the Shipping Board were enterprises in the world. In 1922, it absorbed Lackawanna Steel, the astonished with the change and gave Schwab the credit. Carnegie, in the company that launched America’s rail-making industry 75 years earlier.

124 A Republic—If We Can Keep It Charles Schwab and the Steel Industry 125 last year of his life, called it “a record of accomplishment such as has The government’s solution to these four problems was to threaten never been equaled.” to go into the military supply business and build an armor-plate factory Not all of Schwab’s dealings with the federal government were so with Federal funds. Schwab countered that the government would not productive. The armor plate business is an example of this. The making be able to make armor plate cheaper than he could. After all, Bethlehem of military equipment—armor plate for ships, gun forgings, ordnance, had a veteran work force, a good bonus system, and could buy materials and shrapnel—brought Schwab into regular contact with government more cheaply in bulk. Any vertically integrated company would have an purchasers. Throughout his career, Schwab had problems with these advantage over companies purchasing supplies in the open market. A government contracts. Even at Carnegie Steel, Schwab had quarreled government factory, Schwab insisted, would waste the taxpayers’ with government officials over allegedly defective armor plate; the issue money. never was amicably settled. Misdirected Incentives The problem began in the 1880s when various officials began If Schwab had been a mediator, not a participant, he might have urging the United States to build a large navy. At the time the American been able to settle this dispute. Part of the problem was the same as steel companies were mostly making rails, so President Cleveland and that of the low productivity of the American shipyards during World others began urging the companies to diversify. Making military War I: misdirected incentives. When the navy took bids for contracts equipment was complicated and expensive, however; only reluctantly from the three steel companies, it naturally accepted the lowest bid. But did Bethlehem Iron and Carnegie Steel shift into ordnance. Had the then Navy officials went to the two higher bidders and offered them government not promised them N avy contracts they would not have part of the contract if they would agree to accept the lowest bid. They switched. did this so that all three producers could survive; that way, a future Four things in the military supply business made for tension monopoly of ordnance would be prevented. The problem was that this between the federal government and the steel companies. First, the strategy gave the three companies an incentive to collude and fix prices federal government was the largest and sometimes the only buyer of high. Why should they bid low if all of them would get part of the military equipment; and the government’s notions of quality sometimes contract anyway? A winner-take-all approach would have provided an differed from that of the producers. Often both sides had legitimate incentive for lower bidding, but the Navy was unwilling to do this. Not points of view. Second, since the demand for military equipment was surprisingly, then, year after year the steel companies submitted nearly limited and the costs of building a factory to produce it were high, only identical bids for military equipment. U.S. Steel, Bethlehem Steel, and later Midvale Steel made armor plate. This problem reached a crisis during the Wilson administration. In The potential for either a monopoly or for price-rigging bothered some 1913, Josephus Daniels, Wilson’s Secretary of the Navy, and Ben government officials. Third, a ton of military equipment was more Tillman, Senator from South Carolina, investigated the armor business. expensive to make than a ton of rails or a ton of structural steel; some Both men urged Wilson to back a government armor plant. They held purchasers thought that $450 for a ton of armor plate was price- hearings in Congress on the armor business but did not like what they gouging if rails sold for only $25 per ton. Finally, the ordnance heard. The leaders of the three steel companies all said their bids were producers sometimes made lower bids on foreign contracts than they reasonable. In fact, Schwab submitted figures showing that he and the did on domestic ones. To some in the American government, this was others charged less for armor plate than did England, France, Germany, evidence they were being overcharged; to the steel companies, lower and Japan. If others didn’t believe it, then let the Federal Trade bids meant they had to cut their profit margins to almost zero to Commission look at the accounts and fix a price. Daniels and Tillman overcome tariffs in foreign countries. Also, when American needs were rejected this. They were convinced that the government could make low, the steel men argued they had to get foreign business to keep their armor plate cheaper: the head of the Bureau of Ordnance estimated that factories operating. $10.3 million would build an armor plant and that plate could be made for less than $300 per ton, instead of $454 per ton, which was a typical bid from the steel companies.

126 A Republic—If We Can Keep It Charles Schwab and the Steel Industry 127

In 1916, then, Daniels and Tillman began the campaign to convince beams, or armor plate, he had been successful. Even Carnegie, near Congress to spend $11 million for an armor factory. In the Senate, death, had written Schwab, “I have never doubted your ability to Tillman argued that the government would save money and no longer triumph in anything you undertook. I cannot help feeling proud of you would be at the mercy of identical bids from the “greedy and hoggish” for having far outstripped any of my ‘boys.’” steel companies. President Wilson backed Tillman and said, “I In the 1920s and 1930s, however, Schwab seemed to lose his remember very well my promise to help all I could with the bill for the entrepreneurial spirit. Producing a better product at a lower price no construction of an armor plant and I stand ready t o redeem my longer seemed to dominate his thinking. Let’s “live and let live” Schwab promise.” told the steelmakers at the American Iron and Steel Institute in 1927. Schwab led the effort to defeat the bill. He spoke out against it in Next year, he urged them to fix prices and avoid cutting them. The year public and ran ads in over 3,000 newspapers challenging the need for a after this, Schwab, the father of the Bethlehem beam, urged the steel government plant. He stressed the fairness angle. He said that years ago men not to expand but to use their existing plant capacity. the government had asked Bethlehem to make armor; they had done so When the Great Depression took hold in the 1930s, Schwab’s public only when the government agreed to buy from them. Now, with $7 addresses were full of anecdotes and preaching that “the good . . . lies million invested in equipment, the government was planning to build its ahead.” One of Schwab’s remedies for the ailing economy was a high own plant and make Bethlehem’s useless. protective tariff. He had always favored a tariff on imported steel but Most Congressmen, however, bought the arguments of Tillman and usually settled for low duties. The Smoot- Hawley Tariff of 1930 created Daniels. The bill passed the Senate and the House by about two-to-one the highest duties in American history on many items. margins, and Wilson signed it. As Senator Albert Cummins of Iowa said, Some writers have argued that the Smoot-Hawley Tariff triggered “It is [one of] my profoundest convictions that the manufacture of the Great Depression; others say it merely made the depression worse. armor-plate for battleships is a government function. I hope the private One thing is certain: many nations retaliated against high American enterprises will be entirely eliminated.” tariffs by closing their borders to American-made goods. The demand Dozens of cities lobbied to be the site for the new plant. From Rome, for American goods, therefore, declined and this put more people out of Georgia, to Kalamazoo, Michigan, city after city was put forth as being work. When Cordell Hull, Roosevelt’s Secretary of State, tried to lower uniquely situated to produce armor plate. The winner of this American tariffs in 1934, Schwab opposed it. He was afraid of foreign competition was South Charleston, West Virginia. Congress soon raised competition. the appropriation to $17.5 million and authorized the South Charleston During the 1930s, Schwab enjoyed his role as elder statesman of the plant to make guns and projectiles, as well as armor. steel industry. He was full of stories and ever ready to do interviews Construction began in 1917 on the new factory and on hundreds of with reporters. He never became senile; his ability to memorize houses for the workers. The war delayed the building, but it was speeches and his knack for remembering names and faces was still continued later. Higher construction costs after the war meant an amazing. H e just preferred t o l et Eugene Grace and others run overrun of several million dollars. By 1921, the new plant was making Bethlehem Steel, while he worked the crowd. guns, projectiles, and armor—an at prices apparently much higher than When Schwab retired as an entrepreneur, his fortune became that of Bethlehem Steel. Within a year the whole plant was shut down, jeopardized. He had earlier shown the traits of a dissipater and still had put on “inoperative status,” and never run again. the potential to run through his $25 million fortune. Liberated from work, Schwab traveled, gambled, and flirted more than ever. He joined Looking Backward the New York Whist Club and played there for high stakes. He frequented the roulette tables in Monte Carlo with his favorite mistress. Schwab turned 60 in 1921 and was beginning to look backward The art of speculation, an anathema to Carnegie, appealed to Schwab: he more than forward. There was much to see: whether he had made rails, installed a ticker tape in his mansion to keep tabs on Wall Street; he also

128 A Republic—If We Can Keep It invested in a variety of companies and knew almost nothing about some of them. Gambling wasn’t the only drain on Schwab’s wealth: he co- signed one million dol lars worth of notes—usually worthless—for “friends” and also gave monthly allowances to 27 people. Schwab refused to cut back on expenses, even during the Great 27 Depression. He still hired the most famous musicians of the era to give private recitals for him at Riverside. The mansion itself—complete with swimming pool, wine cellar, gymnasium, bowling alley, six elevators, and 90 bedrooms—needed 20 servants to keep it functioning. He also hired 300 men to care for his 1000-acre estate at Loretto. So Schwab desperately needed his $250,000 annual salary from Bethlehem, given for past services, just to pay his expenses. From 1935 to 1938, a small group of rebel stockholders attended the company’s annual meetings; they challenged Schwab’s salary and told him he had “outlived his usefulness.” He finally stopped them by privately telling one of the critics that he desperately needed the money to live on. Actually he needed more. He couldn’t pay the taxes on Chapter Chapter Twenty-Seven Riverside and couldn’t sell it either, even at a $6 million loss. He couldn’t even give it away, when he offered it as the residence for the mayor. Herbert Dow and Predatory Pricing Schwab’s last years were also marked by poor health and the death of his wife. After her funeral, Riverside was taken by creditors; Schwab One of the sacred cows of statism is the idea that government needs moved into a small apartment. Schwab, who had shown the world a to protect us from predatory price-cutting. Large corporations, vision of entrepreneurship, now had only a vision of death. “A man according to this argument, have big advantages in the marketplace. knows when he doesn’t want to be alive,” he said, “when the will to They can cut prices, drive out their competitors, then raise prices later continue living has gone from him.” Schwab died nine months after he and gouge consumers. Antitrust laws are needed, so the argument said this, at age 77, with debts exceeding assets by over $300,000. continues, to protect small businesses and consumers from those corporations with large market shares in their industries. —BWF, September 1988 The story of Herbert Dow, founder of Dow Chemical Company, is an excellent case study for those who think predatory price-cutting is a real threat to society. Dow, a small producer of bromine in the early 1900s, fo u ght a price-cut ting cartel from Germany. He not only lived to For full footnote citations on quoted materials and other sources, tell about it; he also prospered from it. see Entrepreneurs vs. The State. Readers are especially directed to Robert Hessen’s excellent study, Steel Titan: The Life of Charles M. Born in 1866, Dow was a technical whiz and entrepreneur from Schwab (New York: Oxford University Press, 1975). childhood. His father, Joseph Dow, was a master mechanic who invented equipment for the U.S. Navy. He shared technical ideas with Herbert at the dinner table and the workbench in their home in Derby, Connecticut. He showed Herbert how to make a turbine and even how

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130 A Republic—If We Can Keep It Herbert Dow and Predatory Pricing 131 to modernize a pin factory. Whether Herbert was selling vegetables or The next 15 years of bromine production were a time of testing for taking an engine apart, his father was there to encourage him. Dow. He started three companies. One failed, one ousted him from Dow’s future as an inventive chemist was triggered during his control, and the third, the Dow Chemical Company, struggled to survive senior year at the Case School of Applied Science when he watched the after its founding in Midland, Michigan, in 1897. drilling of an oil well outside Cleveland. At the well site he noticed that The bromine market seemed to have potential, but Dow never had brine had come to the surface. The oil men considered the oozing brine enough money because nothing ever worked as he expected it to. a nuisance. One of them asked Dow to taste it. “Bitter, isn’t it,” the driller Electrolysis was new and untested. His brine cells were too small, and noted. “It certainly is,” Dow added. “Now why would that brine be so the current he passed through the brine was too weak to free all the bitter?” the driller asked. “I don’t know,” Dow said, “but I’d like to find bromine. When he strengthened the current, he freed all the bromine, out.” He took a sample to his lab, tested it, and found it contained both but some chlorine seeped in, too. Instead of being frustrated, Dow lithium (which helped explain the bitterness) and bromine. Bromine would later go into the chlorine business as well. After all, people were was used as a sedative and also to develop film. This set Dow to making money selling chlorine as a disinfectant. So could Dow. wondering if bromine could be extracted profitably from the abundant Meanwhile, the chlorine and bromine were corroding his equipment brine in the Cleveland area. and causing breakdowns. He needed better carbon electrodes, a larger The key to selling bromine was finding a way to separate it cheaply generator, and loyal workers. from brine. The traditional method was to heat a ton of brine, remove Dow found himself working 18-hour days and sleeping at the the crystallized salt, treat the rest with chemicals, salvage only two or factory. He had to economize to survive, so he built his factory in three pounds of bromine, and dump the rest. Dow thought this method Midland with cheap local pine and used nails sparingly. “Crazy Dow” is was expensive and inefficient. Why did the salt—which was often what the Midland people called him when he rode his dilapidated bike unmarketable—have to be removed? Was the use of heat—which was into town to fetch supplies. Laughs, not dollars, were what most very expensive to apply—really necessary to separate the bromine? townsfolk contributed to his visionary plans. To survive, Dow had to be And why throw the rest of the brine away? Were there economical administrator, laborer, and fundraiser, too. He looked at his resources, methods of removing the chlorine and magnesium also found in brine? envisioned the possible, and moved optimistically to achieve it. The answers to these questions were important to Dow: the United For Dow Chemical to become a major corporation, it had to meet the States was ignoring or discarding an ocean of brine right beneath the European challenge. The Germans in particular dominated world earth’s surface. If he could extract the chemicals, he could change chemical markets in the 1800s. They had experience, topflight America’s industrial future. scientists, and monopolies in chemical markets throughout the world. For example, the Germans, with their vast potash deposits, had been the Professor Dow dominant supplier of bromine since it first was mass-marketed in the mid-1800s. Only the United States emerged as a competitor to Germany, After graduation in 1888, Dow took a job as a chemistry professor at and then only as a minor player. Dow and some small firms along the the Huron Street Hospital College in Cleveland. He had his own lab, an Ohio River sold bromine, but only within the country. assistant, and time to work out the bromine problem. During the next year, he developed two processes—electrolysis and “blowing out.” In About 30 German firms had combined to form a cartel, Die Deutsche electrolysis he used an electric current to help free bromine from the Bromkonvention, which fixed the world price for bromine at a lucrative brine; in blowing out he used a steady flow of air through the solution to 49 cents a pound. Customers either paid the 49 cents or they went separate the bromine. Once Dow showed he could use his two methods without. Dow and other American companies sold bromine in the to make small amounts of bromine, he assumed he could make large United States for 36 cents. The Bromkonvention made it clear that if the amounts and sell it all over the world. Americans tried to sell elsewhere, the Germans would flood the American market with cheap bromine and drive them all out of

132 A Republic—If We Can Keep It Herbert Dow and Predatory Pricing 133 business. The Bromkonvention law wa s, “The U.S. for the U .S. a n d fixed price of 49 cents and also below Dow’s 36 cents. Jacobsohn Germany for the world.” arranged a special meeting with Dow in St. Louis and demanded that he Dow entered bromine production with these unwritten rules in quit exporting bromides or else the Germans would flood the American effect, but he refused to follow them. Instead, he easily beat the cartel’s market indefinitely. The Bromkonvention had the money and the 49-cent price and courageously sold America’s first bromine in England. backing of its government, Jacobsohn reminded Dow, and could long He hoped that the Germans, if they found out what he was doing, would continue to sell in the United States below the cost of production. Dow ignore it. Throughout 1904 he merrily bid on bromine contracts was not intimidated; he was angry and told Jacobsohn he would sell to throughout the world. whomever would buy from him. Dow left the meeting with Jacobsohn screaming threats behind him. As Dow boarded the train from St. Louis, he knew the future of his company—if it had a future—depended on A Visit from the Cartel how he handled the Germans. After a few months of this, Dow encountered in his office an angry On that train, Dow worked out a daring strategy. He had his agent in visitor from Germany—Hermann Jacobsohn of the Bromkonvention. New York discreetly buy hundreds of thousands of pounds of German Jacobsohn announced he had “positive evidence that [Dow] had bromine at the 15-cent price. Then he repackaged and sold it in exported bromides.” “What of it?” Dow replied. “Don’t you know that Europe—including Germany!—at 27 cents a pound. “When this 15-cent you can’t sell bromides abroad?” Jacobsohn asked. “I know nothing of price was made over here,” Dow said, “instead of meeting it, we pulled the kind,” Dow retorted. Jacobsohn was indignant. He said that if Dow out of the American market altogether and used all our production to persisted, the Bromkonvention memb ers would run him out of business supply the foreign d eman d . This, as we afterward learned, was not what whatever the cost. Then Jacobsohn left in a huff. they anticipated we would do.” Dow’s philosophy of business differed sharply from that of the Dow secretly hired British and German agents to market his Germans. He was both a scientist and an entrepreneur: he wanted to repackaged bromine in their countries. They had no trouble doing so learn how the chemical world worked, and then he wanted to make the because the Bromkonvention had left the world price above 30 cents a best product at the lowest price. The Germans, by contrast, wanted to pound. The Germans were selling in the United States far below cost of discover chemicals in order to monopolize them and extort high prices production, and they hoped to offset their U.S. losses with a high world for their discoveries. Dow wanted to improve chemical products and price. find new combinations and new uses for chemicals. The Germans were Instead, the Germans were befuddled. They expected to run Dow content to invent them, divide markets among their cartel members, out of business; and this they thought they were doing. But why was and sell abroad at high prices. Those like Dow who tried to compete U.S. demand for bromine so high? And where was this flow of cheap with the cartel learned quickly what “predatory price-cutting” meant. bromine into Europe coming from? Was one of the Bromkonvention The Bromkonvention, like other German cartels, had a “yellow-dog members cheating and selling bromine in Europe below the fixed price? fund,” wh ich was mon e y set a side to use to flo od other co un tries w ith The tension in the Bromkonvention was dramatic. According to Dow, cheap chemicals to drive out competitors. “The German producers got into trouble among themselves as to who Dow, however, was determined to compete with the was to supply the goods for the American market, and the American Bromkonvention. He needed the sales, and he believed his electrolysis agent [for the Germans] became embarrassed by reason of his inability produced bromine cheaper than the Germans could. Also, Dow was to get goods that he had contracted to supply and asked us if we would stubborn and hated being bluffed by a bully. When Jacobsohn stormed take his [15-cent] contracts. This, of course, we refused to do.” out of his office, Dow continued to sell bromine, from England to Japan. Before long, in early 1905, the Bromkonvention went on a rampage: it poured bromides into America at 15 cents a pound, well below its

134 A Republic—If We Can Keep It Herbert Dow and Predatory Pricing 135

Germany in any product that is made in sufficient amount, provided we More Price-Cutting have the time and have learned the tricks of the trade.” The confused Germans kept cutting U.S. prices—first to 12 cents and then to 10.5 cents a pound. Meanwhile, Dow kept buying cheap Move to Magnesium bromine and reselling it in Europe for 27 cents. These sales forced the Dow’s favorite new chemical from the war was magnesium. Bromkonvention to drop its high world price to match Dow and that Magnesium, like bromine and chlorine, was one of the basic elements further depleted the Bromkonvention‘s resources. Dow, by contrast, found in Michigan brine. Dow hated throwing it away and had tried improved his foreign sales force, often ran his bromine plants at top since 1896 to produce it effectively and profitably. As a metal, capacity, and gained business at the expense of the Bromkonvention and magnesium was one-third lighter than aluminum and had strong all other American producers, most of whom had shut down after the potential for industrial use. Magnesium was a chief ingredient in price-cutting. Even when the Bromkonvention finally caught on to what products from Epsom salts to fireworks to cement. Dow was doing, it wasn’t sure how to respond. As Dow said, “We are absolute dictators of the situation.” He also wrote, “One result of this Unfortunately for Dow, the Germans had magnesium deposits near fight has been to give us a standing all over the world. . . . We are . . . in a New Stassfurt. So while he was struggling, the Germans succeeded in much stronger position than we ever were.” He added that “the profits mining magnesium and using it as an alloy with other metals. In 1907, are not so great” because his plants had trouble matching the new 27- they hadformedthe Chloromagnesium Syndikat, or the M agneium s cent world price. He needed to buy the cheap German bromides to stay Trust. ahead, and this was harder to do once the Germans discovered a nd Even before the war, Dow began pouring more capital into exposed his repackaging scheme. magnesium, but only during the war did he begin selling his first small The bromine war lasted four years (1904–08), when finally the amounts. After the war, Dow still could not match Germany’s low cost of Bromkonvention invited Dow to come to Germany and work out an production, but he refused to give up. Instead, he plowed millions of agreement. Since they couldn’t crush Dow, they decided to at least work dollars into developing magnesium as America’s premier lightweight out some deal so they could make money again. The terms were as metal. Part of his problem was the high cost of extracting magnesium; follows: the Germans agreed to quit selling bromine in the United the other problem was the fixation most businessmen had with using States; Dow agreed to quit selling in Germany; and the rest of the world aluminum. was open to free competition. The bromine war was over, but low- The Germans had mixed feelings as they watched Dow struggle with priced bromine was now a fact of life. magnesium. On one hand, they were glad to still have their large market Dow had more capital from the bromine war to expand his business share. On the other hand, they were nervous that Dow would soon and challenge the Germans in other markets. For example, Dow entered discover a method to make magnesium more cheaply than they could. the dye industry and began producing indigo more cheaply than the Their solution was not to work hard on improving their own efficiency, dominant German dye cartel. During World War I, Dow tried to fill but to invite Dow to join them in their magnesium cartel and together several gaps when Germany quit trading with the United States. Aspirin, fix prices for the world. procaine (now better known by its trademark name, Novocain), phenol In a sense, of course, the Germans were paying Dow the strongest (for explosives), and acetic anhydride (to strengthen airplane wings) compliment possible by asking him to join them, not fight them. What’s were all products Dow began producing more cheaply than the interesting, though, is that through the battles with bromine, indigo, Germans did in the World War I era. As he told the Federal Trade phenol, aspirin, and procaine, the Germans persisted in their strategy of Commission when the war began, “We have been up against the German using government-regulated cartels to fix prices and control markets. government in competition, and we believe that we can compete with They continued to believe that monopolies were the best path to controlling markets and making profits.

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Dow must have been flattered by the German offer, but he refused to join the Magnesium Trust. He had already shown the world that his company—by trying to make the best product at the lowest price— could often beat the large German cartels. Predatory price-cutting, the standard strategy of the German chemical cartels, failed again and 28 again. By using the strategy, the Germans unintentionally helped the smaller Dow secure capital, capture markets, and deliver low prices for his products around the world. —BWF, May 1998

Chapter Twenty-Eight

Witch-hunting For Robber Barons: The Standard Oil Story

Among the great misconceptions of the free economy is the widely- held belief that “laissez faire” embodies a natural tendency toward monopoly concentration. Under unfettered capitalism, so goes the familiar refrain, large firms would systematically devour smaller ones, corner markets, and stamp out competition until every inhabitant of the land fell victim to their power. Just as popular is the notion that John D. Rockefeller’s Standard Oil Company of the late 1800s gave substance to such an evil course of events. Regarding Standard Oil’s chief executive, one noted historian writes, “He (Rockefeller) iron-handedly ruined competitors by cutting prices until his victim went bankrupt or sold out, whereupon higher prices would be likely to return.”13

13 Thomas A. Bailey, The American Pageant: A History of the Republic, 2 vols., 8th ed. (Boston: D. C. Heath and Company, 1966), 2:532.

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138 A Republic—If We Can Keep It Witch-hunting For Robber Barons: The Standard Oil Story 139

Two other historians, coauthors of a popular college text, opine that monopoly which turns its back on the very performance which “Rockefeller was a ruthless operator who did not hesitate to crush his produced its success would be posting a sign, “COMPETITORS competitors by harsh and unfair methods.”14 WANTED.” The market rewards excellence and exacts a toll on In 1899, Standard refined 90 per cent of America’s oil—the peak of mediocrity. the company’s dominance of the refining business. Though that market It is my contention that the historical record casts the Standard Oil share was steadily siphoned off by competitors after 1899, the company Company in the role of efficiency monopoly—a firm to which nonetheless has been branded ever since as “an industrial octopus.” consumers repeatedly awarded their votes of confidence. Does the story of Standard Oil really present a case against the free The oil rush began with the discovery of oil by Colonel Edwin Drake market? In my opinion, it most emphatically does not. Furthermore, at Titusville, Pennsylvania in 1859. Northwestern Pennsylvania soon setting the record straight on this issue must become an important “was overrun with businessmen, speculators, misfits, horse dealers, weapon in every fr ee ma r ket advo cate’s intellectual arsenal. That’s the drillers, bankers, and just plain hell-raisers. Dirt-poor farmers leased purpose of the following remarks. land at fantastic prices, and rigs began blackening the landscape. Theoretically, there are two kinds of monopoly: coercive and Existing towns jammed full overnight with ‘strangers,’ and new towns 15 efficiency. A coercive monopoly results from, in the words of Adam appeared almost as quickly.” Smith, “a government grant of exclusive privilege.” Government, in In the midst of chaos emerged young John D. Rockefeller. An effect, must take sides in the market in order to give birth to a coercive exceptionally hard- working and thrifty man, Rockefeller transformed monopoly. It must make it difficult, cost ly, or impossible for anyone but his early interest in oil into a partnership in the refinery stage of the the favored firm to do business. business in 1865. The United States Postal Service is an example of this kind of Five years later, Rockefeller formed the Standard Oil Company with monopoly. By law, no one can deliver first class mail except the USPS. 4 per cent of the refining market. Less than thirty years later, he Fines and imprisonment (coercion) await all those daring enough to reached that all-time high of 90 percent. What accounts for such compete. stunning success? In some other cases, the government may not ban competition On December 30, 1899, Rockefeller was asked that very question outright, but simply bestow privileges, immunities, or subsidies on one before a governmental investigating body called the Industrial firm while imposing costly requirements on all others. Regardless of the Commission. He replied: method, a firm which enjoys a coercive monopoly is in a position to I ascribe the success of the Standard to its consistent policy to make harm the consumer and get away with it. the volume of its business large through the merits and cheapness An efficiency monopoly, on the other hand, earns a high share of a of its products. It has spared no expense in finding, securing, and market because it does the best job. It receives no special favors from utilizing the best and cheapest methods of manufacture. It has the law to account for its size. Others are free to compete and, if sought for the best superintendents and workmen and paid the best consumers so will it, to grow as big as the “monopoly.” wages. It has not hesitated to sacrifice old machinery and old plants An efficiency monopoly has no legal power to compel people to deal for new and better ones. It has placed its manufactories at the with it or to protect itself from the consequences of its unethical points where they could supply markets at the least expense. It has practices. It can only attain bigness through its excellence in satisfying not only sought markets for its principal products, but for all customers and by the economy of its operations. An efficiency possible by-products, sparing no expense in introducing them to the public. It has not hesitated to invest millions of dollars in methods of

14 Gilbert C. Fite and Jim E. Reese, An Economic History of the United States, 2nd ed. 15 D. T. Armentano, The Myths of Antitrust: Economic Theory and Legal Cases (New (Boston: Houghton Mifflin Company, 1965), p. 367. Rochelle, N.Y.: Arlington House, 1972), p. 64.

140 A Republic—If We Can Keep It Witch-hunting For Robber Barons: The Standard Oil Story 141

cheapening the gathering and distribution of oils by pipe lines, Not far away from the canning works, on Newton Creek, is an oil special cars, tank steamers, and tank wagons. It has erected tank refinery. This oil runs to the canning works, and, as the newmade stations at every important railroad station to cheapen the storage cans come down by a chute from the works above, where they have and delivery of its products. It has spared no expense in forcing its just been finished, they are filled, twelve at a time, with the oil made products into the markets of the world among people civilized and a few miles away. The filling apparatus is admirable. As the uncivilized. It has had faith in American oil, and has brought newmade cans come down the chute they are distributed, twelve in together millions of money for the purpose of making it what it is, a row, along one side of a turn-table. The turn-table is revolved, and and holding its markets against the competition of Russia and all the the cans come directly under twelve measures, each holding five many countries which are producers of oil and competitors against gallons of oil—a turn of a valve, and the cans are full. The table is American oil. 16 turned a quarter, and while twelve more cans are filled and twelve fresh ones are distributed, four men with soldering cappers put the caps on the first set. Another quarter turn, and men stand ready to A Master Organizer of Men and Materials take the cans from the filler and while they do this, twelve more are Rockefeller was a managerial genius—a master organizer of men as having caps put on, twelve are filling, and twelve are coming to their well as of materials. He had a gilt for bringing devoted, brilliant, and place from the chute. The cans are placed at once in wooden boxes hard-working young men into his organization. Among his most standing ready, and, after a twenty-four-hour wait for discovering outstanding associates were H. H. Rogers, John D. Archbold, Stephen V. leaks, are nailed up and carted to a nearby door. This door opens on Harkness, Samuel Andrews, and Henry M. Flagler. Together they the river, and there at anchor by the side of the factory is a vessel emphasized efficient economic operation, research, and sound financial chartered for South America or China or where not—waiting to practices. The economic excellence of their performance is described by receive the cans which a little more than twenty-four hours before economist D. T. Armentano: were tin sheets lying on flatboxes. It is a marvellous example of economy, not only in materials, but in time and in footsteps. 18 Instead of buying oil from jobbers, they made the jobbers’ profit by sending their own purchasing men into the oil region. In addition, they made their own sulfuric acid, their own barrels, their own Market Competition Protects the Public lumber, their own wagons, and their own glue. They kept minute and accurate records of every item from rivets to barrel bungs. They Socialist historian Gabriel Kolko, who argues in The Triumph of built elaborate storage facilities near their refineries. Rockefeller Conservatism that the forces of competition in the free market of the late bargained as shrewdly for crude as anyone before or since. And Sam 1800s were too potent to allow Stan dard to cheat the public, stresses Andrews coaxed more kerosene from a barrel of crude than could that “Standard treated the consumer with deference. Crude and refined the competition. In addition, the Rockefeller firm put out the oil prices for consumers declined during the period Standard exercised 19 cleanest-burning kerosene, and managed to dispose of most of the greatest control of the industry . . .” residues like lubricating oil, paraffin, and vaseline at a profit.17 Standard’s service to the consumer in the form of lower prices is Even muckraker Ida Tarbell, one of Standard’s critics, admired the well-documented. To quote from Professor Armentano again: company’s streamlined processes of production: Between 1870 and 1885 the price of refined kerosene dropped from 26 cents to 8 cents per gallon. In the same period, the Standard Oil

16 Thomas G. Manning, E. David Cronon, and Howard R. Lamar, The Standard Oil 18 Ida M. Tarbell, The History of the Standard Oil Company, 2 vols. in 1 (Gloucester, Mass.: Company: The Rise of a National Monopoly, part 3: Government and the American Peter Smith, 1950), p. 240-241. Economy: 1870 to the Present, revised (N ew York: Henry Holt and Company, 1960), p. 19 Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American His tory, 19. 1900-1916 (New York: The Macmillan Company, 1963; reprint ed., Chicago: Quad rangle 17 Armentano, Myths of Antitrust, p. 67. Books, 1967), p. 39.

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Company reduced the [refining] costs per gallon from almost 3 cents in misdirected . McGee pointed out that some of these very peo ple later 1870 to .452 cents in 1885. Clearly, the firm was relatively efficient, and opened new refineries and successfully challenged Standard again. its efficiency was being translated to the consumer in the form of lower Beyond the actual record, economic theory also argues against a prices for a much improved product, and to the firm in the form of winning policy of predatory price cutting in a free market for the 20 additional profits. following reasons: That story continued for the remainder of the century, with the 1. Price is only one aspect of competition. Firms compete in a variety price of kerosene to the consumer falling to 5.91 cents per gallon in of ways: service, location, packaging, marketing, even courtesy. For 1897. Armentano concludes from the record that “at the very pinnacle price alone to draw customers away from the competition, the predator of Standard’ s industry ‘control,’ the costs and the prices for refined oil would have to cut substantially—enough to outweigh all the other 21 reached their lowest levels in the history of the petroleum industry.” competitive pressures the others can throw at him. That means John D. Rockefeller’s success, then, was a consequence of his suffering losses on every unit sold. If the predator has a war-chest of superior performance. He derived his impressive market share not from “monopoly profits” to draw upon in such a battle, then the predatory government favors but rather from aggressive courting of the price cutting theorist must explain how he was able to achieve such consumer. Standard Oil is one of history’s classic efficiency monopolies. ability in the absence of this practice in the first place! But what about the many serious charges leveled against Standard? 2. The large firm stands to lose the most. By definition, the large firm Predatory price cutting? Buying out competitors? Conspiracy? Railroad is already selling the most units. As a predator, it must actually step up rebates? Charging any price it wanted? Greed? Each of these can be its production if it is to have any effect on competitors. As Professor viewed as an assault not just on Standard Oil but on the free market in McGee observed, “To lure customers away from somebody, he (the general. They can and must be answered. predator) must be prepared to serve them himself. The monopolizer thus finds himself in the position of selling more—and therefore losing more—than his competitors.”24 Predatory price cutting 3. Consumers will increase their purchases at the “bargain prices.” Predatory price cutting is “the practice of deliberately underselling This factor causes the predator to step up production even further. It rivals in certain markets to drive them out of business, and then raising also puts off the day when he can “cash in” on his hoped-for victory prices to exploit a market devoid of competition.”22 because consumers will be in a position to refrain from purchasing at Professor John S. McGee, writing in the Journal of Law and higher prices, consuming their stockpiles instead. Economics for October 1958, stripped this charge of any intellectual 4. The length of the battle is always uncertain. The predator does not substa n ce. Describing it as “logically deficient,” he concluded, “I can find know how long he must suffer losses before his competitors quit. It may little or no evidence to support it.23 take weeks, months, or even years. Meanwhile, consumers are “cleaning In his extraordinary article, McGee scrutinized the testimony of up” at his expense. Rockefeller’s competitors who claimed to have been victims of 5. Any “beaten” firms may reopen. Competitors may scale down pro- predatory price cutting. He found their claims to be shallow and duction or close only temporarily as they “wait out the storm.” When the predator raises prices, they enter the market again. Conceivably, a “beaten” firm might be bought up by someone for a “song,” and then,

20 Armentano, Myths of Antitrust, p. 70. under fresh management and with relatively low capital costs, face the 21 Ibid., p. 77. predator with an actual competitive cost advantage. 22 Ibid., p. 73. 23 John S. McGee, “Predatory Price Cutting: The Standard Oil (N.J.) Case,” Journal of Law and Economics, I (October, 1958), p. 138. 24 Ibid., p. 140.

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6. High prices encourage newcomers. Even if the predator drives Buying out competitors can be a wise move if achieving economy of everyone else from the market, raising prices will attract competition scale is the intent. Buying out competitors merely to eliminate them from people heretofore not even in the industry. The higher the prices from the market can be a futile, expensive, and never-ending policy. It go, the more powerful that attraction. appears that Rockefeller’s mergers were designed with the first motiv e 7. The predator would lose the favor of consumers. Predatory price in mind. cutting is simply not good public relations. Once known, it would swiftly Even so, other people found it profitable to go into the business of erode the public’s faith and good will. It might even provoke consumer build-ing refineries and selling to Standard. David P. Reighard managed to boycotts and a backlash of sympathy for the firm’s competitors. build and sell three succes sive refiner i es to Rockefeller, a ll on exce llent In summary, let me quote Professor McGee once again: terms. Judging from the Record, Standard Oil did not use predatory price A firm which adopts a policy of absorbing others solely to stifle discrimination to drive out competing refiners, nor did its pricing competition embarks upon the impossible adventure of putting out the practice have that effect. Whereas there may be a very few cases in recurring and unpredictable prairie fires of competition. which retail kerosene peddlers or dealers went out of business after or during price cutting, there is no real proof that Standard’s pricing Conspiracy To Fix Prices policies were responsible. I am convinced that Standard did not systematically, if ever, use local price cutting in retailing, or This accusation holds that Standard secured secret agreements with anywhere else, to reduce competition. To do so would have been competitors to carve up markets and fix prices at higher-than-market foolish; and, whatever else has been said about them, the old levels. Standard organization was seldom criticized for making less money I will not contend here that Rockefeller never attempted this policy. when it could readily have made more. 25 His experiment with the South Improvement Company in 1872 provides at least some evidence that he did. I do argue, however, that all such attempts were failures from the start and no harm to the consumer Buying out competitors occurred. The intent of this practice, the critics say, was to stifle competitors Standard’s price performance, cited extensively above, supports my by absorbing them. argument. Prices fell steadily on an improving product. Some First, it must be said that Standard had no legal power to coerce a conspiracy! competitor into selling. For a purchase to occur, Rockefeller had to pay From the perspective of economic theory, collusion to raise and/or the market price for an oil refinery. And evidence abounds that he often fix prices is a practice doomed to failure in a free market for these hired the very people whose operations he purchased. “Victimized ex- reasons: rivals,” wrote McGee, “might be expected to make poor employees and dissident or unwilling shareholders.”26 1. Internal pressures. Conspiring firms must resolve the dilemma of production. To exact a higher price than the market currently permits, Kolko writes that “Standard attained its control of the refinery production must be curtailed. Otherwise, in the face of a fall in demand, business primarily by mergers, not price wars, and most refinery the firms will be stuck with a quantity of unsold goods. Who will cut owners were anxious to sell out to it. Some of these refinery owners their production and by how much? Will the conspirators accept an 27 later reopened new plants after selling to Standard.” equal reduction for all when it is likely that each faces a unique constellation of cost and distribution advantages and disadvantages? 25 Ibid., p. 168. Assuming a formula for restricting production is agreed upon, it 26 Ibid., p. 145. 27 Kolko, Triumph of Conservatism, p. 40. then becomes highly profitable for any member of the cartel to quietly

146 A Republic—If We Can Keep It Witch-hunting For Robber Barons: The Standard Oil Story 147 cheat on the agreement. By offering secret rebates or discounts or other As an “efficiency monopoly,” Standard could not coercively prevent “deals” to his competitors’ customers, any conspirator can undercut the others from competing with it. And others did, so much so that the cartel price, earn an increasing share of the market and make a lot of company’s share of the market declined dramatically after 1899. As the money. When the others get wind of this, they must quickly break the economy shifted from kerosene to electricity, from the horse to the agreement or lose their market shares to the “cheater.” The very reason automobile, and from oil production in the East to production in the for the conspiracy in the first place—higher profits—proves to be its Gulf States, Rockefeller found himself losing ground to younger, more undoing! aggressive men. 2. External pressures. This comes from competitors who are not Neither did Standard have the power to compel people to buy its parties to the secret agreement. They feel under no obligation to abide products. It had to rely on its own excellence to attract and keep by the cartel price and actually use their somewhat lower price as a customers. selling point to customers. The higher the cartel price, the more this In a totally free market, the following factors insure that no firm, external competition pays. The conspiracy must either convince all regardless of size, can charge and get “any price it wants”: outsiders to join the cartel (making it increasingly likely that somebody will cheat) or else dissolve the cartel to meet the competition. 1. Free entry. Potential competition is encouraged by any firm’s abuse of the consumer. In describing entry into the oil business, I would once again call the reader’s attention to Kolko’s The Rockefeller once remarked that “all sorts of people . . . the butcher, the Triumph of Conservatism, which documents the tendency for collusive baker, and the candlestick maker began to refine oil.”28 agreements to break apart, sometimes even before the ink is dry. 2. Foreign competition. As long as government doesn’t hamper international trade, this is always a potent force. Railroad rebates 3. Competition of substitutes. People are often able to substitute a John D. Rockefeller received substantial rebates from railroads that product different from yet similar to the monopolist’s. hauled his oil, a factor which critics claim gave him an unfair advantage 4. Competition of all goods for the consumer’s dollar. Every business- over other refiners. man is in competition with every other businessman to get consumers The fact is that most all refiners received rebates from railroads. to spend their limited dollars on him. This practice was simply evidence of stiff competition among the roads 5. Elasticity of demand. At higher prices, people will simply buy less. for the business of hauling refined oil products. Standard got the biggest rebates because Rockefeller was a shrewd bargainer and because he It makes sense to view competition in a free market not as a static offered the railroads large volume on a regular basis. phenomenon, but as a dynamic, neverending, leapfrog process by which the leader today can be the follower tomorrow. This charge is even less credible when one considers that Rockefeller increasingly relied on his own pipelines, not railroads, to transport his oil.

Rockefeller was greedy The charge that John D. Rockefeller was a “greedy” man is the most meaningless of all the attacks on him but nonetheless echoes constantly The Power To Charge Any Price Wanted in the history books. According to the notion that Standard’s size gave it the power to charge any price it wanted, bigness per se immunizes the firm from competition and consumer sovereignty. 28 John A. Garraty, The American Nation, vol. 2: A History of the United States Since 1865, 3rd ed. (New York: Harper and Row, 1975), p. 499.

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If Rockefeller wanted to make a lot of money (and there is no doubting he did), he certainly discovered the free market solution to his problem: produce and sell something that consumers will buy and buy again. One of the great attributes of the free market is that it channels greed into constructive directions. One cannot accumulate wealth 29 without offering something in exchange! At this point the reader might rightly wonder about the dissolution of the Standard Oil Trust in 1911 . Ddn’tthe i Supreme Cortu fn i d Standard guilty of successfully employing anti-competitive practices? Interestingly, a careful reading of the decision reveals that no attempt was made by the Court to examine Standard’s conduct or performance. The justices did not sift through the conflicting evidence concerning any of the government’s allegations against the company. No specific finding of guilt was made with regard to those charges. Although the record clearly indicates that “prices fell, costs fell, outputs expanded, product quality improved, and hundreds of firms at one time or another produced and sold refined petroleum products in Chapter Twenty-Nine competition with Standard Oil,”29 the Supreme Court ruled against the company. The justices argued simply that the competition between some of the divisions of Standard Oil was less than the competition that John D. Rockefeller and His Enemies existed between them when they were separate companies before merging with Standard. One hundred years ago John D. Rockefeller, America’s first In 1915, Charles W. Eliot, president of Harvard, observed: “The billiona i re and the head of Standard Oil, faced a critical issue: w hat organization of the great business of taking petroleum out of the earth, should he do about the criticisms of investigative journalist Ida Tarbell? piping the oil over great distances, distilling and refining it, and To Rockefeller, the solution was simple—ignore her. He was distributing it in tank steamers, tank wagons, and cans all over the marketing 60 percent of all oil sold in the whole world. His company earth, was an American invention.”30 Let the facts record that the great was popular with consumers everywhere. Therefore, let his actions Standard Oil Company, more than any other firm, and John D. speak for themselves. Rockefeller, more than any other man, were responsible for this Rockefeller had entered the raucous oil business during the Civil amazing development. War, when oil often sold for a dollar a gallon. While most refiners —LWR, March 1980 dumped oil byproducts into nearby rivers, Rockefeller wisely hired research-and-development men to produce waxes, paving materials, and detergents from the seemingly unmarketable sludge that was discarded. He also developed the technology to get more kerosene out of a barrel of oil than anyone else. Rockefeller had become a billionaire by making a fraction of a cent per gallon selling millions of gallons of kerosene to illuminate every civilized part of the earth.

29 D. T. Armentano, Myths of Antitrust, p. 83. 30 Fite and Reese, An Economic History, p. 366. 149

150 A Republic—If We Can Keep It John D. Rockefeller and His Enemies 151

The result was often win-win for everyone. The U.S. became a major industrial country, and inefficient refiners in the United States sold out Beware Muckraking for Standard Oil stock, which often made them comfortable for life. As one editor in oil-rich Titusville, Pennsylvania, exclaimed, “Men until The Walmarts of the world need to take note: political agitation plus now barely able to get a poor living off poor land are made rich beyond muckraking can defeat a competitive product enjoyed by millions of their wildest dreaming.” consumers. Rockefeller’s decision to “let the facts speak for themselves” was naive. His “facts” were dwarfed by the negative publicity from However, even with cheap oil and the prospering of the United McClure’s, from editorial pages, and finally from the White House. In States, Ida Tarbell was unhappy. In 1904 she wrote The History of the 1911 the Sherman Anti-Trust Act was used against Standard Oil. Standard Oil Company, which complained loudly about Rockefeller and his company. He was a cutthroat competitor, she insisted, who relied on If Rockefeller had chosen to challenge Tarbell, he could have made rebates to outsell his rivals. “The ruthlessness and persistency with two useful points. First, Standard Oil rose to economic power not on which he cut and continued to cut their prices drove them to despair,” rebates but on providing cheap oil to the general public. “We must ever she wrote. Furthermore, he low-balled those whom he sought to buy remember,” Rockefeller told one of his partners, “we are refining oil for out. Innuendo became a powerful Tarbell weapon: “There came to be a the poor man and he must have it cheap and good.” Or as he put it to popular conviction that the ‘Standard would do anything.’” She con- another partner, “Hope we can co ntinue to hold out with the best cluded that Rockefeller “has done more than any other person to fasten illuminator in the world at the lowest price.” on this country the most serious interference with free individual Rockefeller did receive large rebates, but he earned them by development.” supplying the largest shipments of oil. Without the large shipments, How might we explain Tarbell’s astonishing animus? The motivating which came through low costs of production, he would not have had force seems to be that her father, whom she adored, chose to compete any leverage to win low shipping rates from the railroads. In any case, with Rockefeller rather than sell to him. When Franklin Tarbell proved those low c o sts were mainly passed along t o consumers by further unable to market oil for eight cents a gallon, he brooded at home and reducing the price of his oil. Ida’s blissful childhood was diminished. Her brother became an officer Second, Rockefeller avoided predatory price-cutting because it for a competing oil company, so wh en Ida w as growing up she heard tended to hurt him more than his competitors. That point is often hard much grumbling about Standard Oil. to understand, but economist John S. McGee did extensive research on Tarbell serialized her book in McClure’s magazine, which was a Standard Oil’s pricing policies and discovered that predatory price- prominent publication of the early 1900s. The timing of her attacks cutting was an anathema to Rockefeller. meshed well with certain fears that were growing in America about As McGee and others have pointed out, since Rockefeller did most of large companies and their potential for monopoly and price-fixing. In the oil business in the United States, if he cut prices he would be losing 1901, for example, U.S. Steel had become the first billion-dollar the small profits he was earning on the lion’s share of the business he corporation and it controlled more than 60 percent of the steel market. was already doing. Also, even if he gained a 100 percent market share, Would monopolies prevail and competition be diminished? Tarbell that gain would be temporary. The moment he tried to raise prices, suggested that Standard Oil’s sinister rise to power was dangerous and other competitors would re-emerge, the price would fall again, and undesir-able. President Theodore Roosevelt agreed, and with his Rockefeller would (at best) be back where he started. blessing the Justice Department began a lengthy assault on Standard Oil The charges that Rockefeller thrived on “unfair rebates” and that he that resulted in its breakup into more than 30 companies. was eagerly waiting to employ predatory price-cutting did him a great deal of damage and offset the favorable opinion many Americans had of him and of his oil.

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Tarbell also attacked Rockefeller’s character. She wrote that his “big hand reached out from nobody knew where, to steal their conquest and throttle their future. The suddenness and the blackness of the assault on their business stirred to the bottom their manhood and their sense of fair play.” 30 Even Rockefeller’s relatively modest house, Tarbell claimed, was “a monument of cheap ugliness.” Yes, she conceded, his frugality was “a welcome contrast to the wanton lavishness which on every side of us corrupts taste and destroys a sense of values.” However, she noted, “One would be inclined to like Mr. Rockefeller the better for his plain living if somehow one did n ot f e el th a t here was something more t han frugality, that here was parsimony . . . made a virtue.” If Rockefeller instead had built a magnificent mansion and had spent money lavishly, she could then have attacked him for wasting the money he greedily extracted from others. Rockefeller co uld not win, and that was, in part, the problem of allowing Ta rbell to go u nchallenged. Sometimes Tarbell must have been perplexed. Rockefeller, she Chapter Thirty admitted, was a stable family man who was loved by his wife and children. By contrast, her boss, S. S. McClure, was a chronic adulterer. It Wasn’t Government that Fixed Your Clock But she chided McClure in private and Rockefeller in the pages of her bestseller. Remember the old Chicago song, “Does Anybody Really Know What —BWF, May 2008 Time It Is?” Well, if you asked that question about 120 years ago, you could have received 38 different answers in a single state and many more than that in some countries. How the invention of standard time brought order out of an astonishing degree of confusion is a sadly forgotten tale and a great tribute to ingenuity in a free society. People in the continental United States have become so accustomed to four standardized time zones–Eastern, Central, Mountain, and Pacific–that it’s hard to believe that we ever kept time any other way. But until a crucial date in 1883, what time it was depended on the nearest city or town. The time of day was a purely local matter as determined by the position of the sun. Noon was when the sun was at its highest point in the sky. Local people set their timepieces by some well-known clock in their respective communities, such as one on a prominent church steeple or in a jeweler’s window. This meant that when it was noon in Chicago, it was 12:31 p.m. in Pittsburgh, 12:24 in Cleveland, 12:13 in Cincinnati, and 12:07 in Indiana- polis. Or, when it was noon in Detroit, it was about 11:50 in Grand Rapids. 153 154 A Republic—If We Can Keep It It Wasn’t Government that Fixed Your Clock 155

Indeed, there were at least 27 different local times within the state of every railroad in the country. “Railroad time” quickly became the new Michigan alone. Indiana was slightly less confusing with just 23 local “local time” everywhere–or at least almost everywhere. times, but Wisconsin—with 38—was a clock-watcher’s nightmare. Detroit Holds Out “In every city and town,” historian Stewart Holbrook wrote in his Time marched on, but Detroit didn’t. The view that the sun, not man, 1947 book, The Story of American Railroads, “the multiplicity of time dictates what time it is enjoyed broad support in the city. Henry Ford standards confused and bewildered passengers, shippers, and railway complained about the disparity; he designed a watch with two dials, one employees. Too often, errors and mistakes turned out disastrously, for that kept local time for when he was in Detroit and the other that kept railroads were now running fast trains on tight schedules; a minute or standard time. two might mean the differe nce between smooth operation and a collision.” Detroit stuck to local time until 1900, when the City Council ordered clocks set back 28 minutes to comply with Central Standard Time. Half Traveling from north to south (or vice versa) presented no time the city refused to obey, and the City Council rescinded its order. It problems but east to west (or west to east) was another story wasn’t until 1905 that Detroit, by a c itywide vote, adopted standard altogether. Predicting the time a train would arrive at any particular time and became part of the Central time zone. stop was no small feat in the days before standard time. In his 1990 book, Keeping Watch: A History of American Time, Michael O’Malley While standardized time zones were speedily and voluntarily reveals that “A traveler on a westbound train, setting his watch at embraced by most of the country, the federal government actually departure, might find after less than half an hour’s travel that his watch sought to prevent it. The director of the Naval Observatory argued and the local time no longer agreed. To make matters worse, individual strenuously against any manmade challenge to the authority of the sun. railroad and steamship lines each ran by their own standards of time– The U.S. Attorney General ordered that no department of the federal usually the time of the city the line originated in. When two lines met, or government could run according to the system developed in 1883 until shared a track, or terminated at a steamship landing, it threw authorized by Congress, which took 35 years. In March 1918 Congress differences in timekeeping into high relief.” Something clearly had to be finally put Washington’s stamp of approval on what had been done. accomplished through private initiative, with one major adjustment: It took Michigan and western Ohio out of the Central time zone and put Two men in particular are credited with “inventing” standard time them in the Eastern zone, where they remain today. and the time zones that define it. Professor C. F. Dowd, principal of Temple Grove Seminary for Young Ladies at Saratoga Springs, New What about the rest of the world? An International Meridian York, first suggested the general concept of four or more “time belts.” Conference was held in late 1884, a year after standard time took effect Later, William Frederick Allen, a railroad engineer, adapted and in the United States. Delegates representing governments from 25 improved it and won acceptance for it by a crucial panel. countries debated two main issues: Should they adopt a system of global standardized time zones, and if so, where should the starting In 1872 railroad officials from around the country met in Missouri point, or “prime meridian,” be? The success of the American experience to arrange summer passenger schedules. To address the time problem helped resolve the first issue with dispatch, but just as quickly the they formed the General Time Convention. Allen was named secretary second issue hit a geopolitical snag. Britain’s longstanding maritime and immediately set to work on making Dowd’s idea into a detailed dominance put the imaginary line through its Greenwich Observatory in proposal. In October 1883 the Convention approved Allen’s plan. the lead for prime meridian. The French preferred Paris but suggested a Government was not part of the picture at all; the Dowd-Allen solution compromise: They would accept Greenwich if the Brits and the to establish standardized time zones was conceived and fine-tuned to Americans adopted the metric system. The Conference approved fruition entirely by the ingenuity of private citizens. The Convention Greenwich without the metric condition, so feeling snubbed the French chose November 18, 1883, for adoption of the new system by virtually went their own way and didn’t recognize the prime meridian until 1911.

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Private enterprise saw a dilemma as a problem to be solved. Governments dragged their collective feet and politicized it. As Yogi Berra would say, this sounds like “déjà vu all over again.” What time is it? Thanks not to pretentious central planners but to creative entrepreneurs, no matter where you live, there’s been a 31 uniform answer to that question for about a century. —LWR, August 2002

Chapter Thirty-One

History for Sale: Why Not?

“Sold!” cried the Sotheby’s auctioneer on the night of December 18, 2007, as one of history’s oldest political documents changed hands. It was Magna Carta, or rather a copy of it that dated to 1297. The buyer was not a government but an individual, a Washington lawyer named David Rubenstein. He paid $21.3 million for it and promptly announced he wanted his newly acquired private property to stay on public view at the National Archives in t he nation’s capital. A privately owned Magna Carta? Aren’t such important things supposed to be public property? A couple of “educated” American students visiting Britain in mid-December certainly thought so. For a story that aired on CNN about the auction at Sotheby’s, they were interviewed at the British Library in London while gazing on another of the great charter’s copies on display there. “I couldn’t imagine that there is still a privately owned copy of the Magna Carta floating around the world. It seems really incredible that any one person should actually have that in their possession,” one of the young scholars pronounced. “Personally, I hope the government or

157 158 A Republic—If We Can Keep It History for Sale: Why Not? 159 some charitable foundation gets a hold of it so that everybody can enjoy libraries that preserved important books that could be read by seeing it,” chimed the other. Both assumed that private property and members of the public and even borrowed and sent with messengers. public benefit, at least with regard to historical preservation, were Books could be consulted or copied for one’s own library and returned incompatible. to the owner. If one wanted to look at several books, a personal visit to a The Magna Carta copy that Rubenstein bought will not be spirited private l i brary could be arranged. into his closet because it is the new owner’s wish that it be preserved The Bodleian Library at Oxford, where Olson once studied, was for public display. While some might say humanity lucked out in this founded by Sir Thomas Bodley and dedicated in 1602. King James I, on particular instance, it really is just the latest in a rich heritage of private entering the library in August 1605, said its founder should be dubbed care of documents, manuscripts, and objects of historical significance. “Sir Thomas Godly.” Bodley had spent his considerable personal wealth Indeed, the very copy Rubenstein bought was previously owned by acquiring books and early manuscripts that have formed the core of one businessman Ross Perot’s foundation, which in turn had acquired it in of the most extensive collections in the world. That collection includes 1984 from yet another private owner, the Brudenell family of Britain. among its innumerable treasures a first edition of Don Quixote, a Given that record, those students should have sung hosannas to private manuscript of Confucius acquired at a time when few could read its efforts like that of Rubenstein’s. Chinese characters, a fourteenth-century copy of Dante’s Divine Comedy, The content of books from the ancient world appears to have been as well as first editions of the works of John Milton, who called the brought into the digital age largely through private efforts. Through library a “most sacred centre,” a “glorious treasure-house” of “the best various eras, libraries, scribes, and printers were supported to a great Memorials of Man.” extent through private patronage. Additional examples of historical preservation through private Ecclesiastical institutions were critical in preserving texts that are means are, it turns out, legion. Pittsburgh banker Andrew Mellon important to the Western tradition, points out Dr. Ryan Olson, director acquired a massive assortment of prized artwork. He donated his entire of education policy at the Mackinac Center for Public Policy and holder collection (plus $10 million for construction) to start the National of a doctorate in the classics from Oxford University. For example, Olson Gallery of Art in Washington, D.C. Tens of thousands of historic homes says, in the sixth century Cassiodorus finished his career as a and buildings all across America are owned and maintained privately, government official in Ravenna and organized monastic efforts to copy many of them refurbished and open for public viewing. Even historic Christian and classical texts. Some work of his monks seems to have lighthouses, once largely public property, are being preserved today by ended up in Rome, where it could be more influential. Though the private owners after decades of neglect by government authorities. On history of transmission can be difficult to trace, scholars have argued and on it goes. that at least one classical work, by Cato, seems to have survived to this The more one looks into this, the more apparent it is that private day because of Cassiodorus’s efforts. “It is our intention,” Cassiodorus efforts have not just been a sideshow in historical preservation. They wrote shortly before his death, “to weave into one fabric and assign to have been the centerpiece. And why should it be otherwise? Private proper usage whatever the ancients have handed down to modern owners invest their own resources, acquiring an instant and personal custom.” interest in the “capital” value of the historical asset. Being a government employee does not make one more interested in, or better equipped to care for, the things we regard as historically valuable than those many Borrowing From Cicero private citizens who put their own resources on the line. I also learned from Olson that the Roman politician, lawyer, and By the way, have you ever noticed that the greatest book-burners in author Cicero revealed in his letters a network of extensive personal history have been governments, not private individuals?

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So what’s the problem with a copy of Magna Carta being purchased by a private citizen? Nothing at all. To suggest otherwise is simply to repeat an uninformed and antiquated prejudice. In a civil society of free people, that prejudice should be rare enough to be a museum piece. Part V

—LWR, May 2008

The Negative Power of the Bureaucrat

Chapter Thirty-Two

John Jacob Astor and the Fur Trade: Testing the Role of Government

What was the first industry in U.S. history to receive a federal subsidy? That dubious honor seems to go to the fur trade. If we study the story of the fur trade, we can see why government-supported companies so often fail and why entrepreneurs tend to provide better products at lower costs. The buying and selling of furs was a major industry in America throughout its early history. The key animal in the fur trade was the beaver, whose pelt made hats that were in style all over Europe in the 1700s. The fur trade was a worldwide enterprise. It linked fashionable women in Paris to New York exporters, to frontier traders, to Indian trappers. The pelts of beavers, muskrats, otters, and minks went one way and kettles, blankets, axes, and muskets went the other. At first, fur trading in the United States followed established patterns. The French and British had traded with the Indians for more than a century and the Americans simply picked up where they left off. Trapping methods, river routes, and trading posts were all in place. 163 164 A Republic—If We Can Keep It John Jacob Astor and the Fur Trade: Testing the Role of Government 165

The man who confounded the normal development of private McKenney worked hard and took his job seriously. He wrote long enterprise in furs was none other than President George Washington. letters to Indians, invited them to Washington, and tried to expand his Washington feared that the many British fur traders along the Canadian staff so he could deal with them more directly. Indians needed to be border might stir up the Indians, win their loyalties, and thwart U.S. assimilated into American life, McKenney argued. Schools and farms, expansion into its own territory. not trapping and hunting, were McKenney’s vision for future Indian life. Private American traders, Washington argued, were too small to Therefore, he stocked the factories with hoes, plows, and other farm compete with larger, more experienced British enterprises. The U.S. equipment. An active government, McKenney believed, was the best government itself was needed to build large trading posts, oust the means to “amend the heads and hearts of the Indian.” British, “bring in a small profit, . . . and fix them [the Indians] strongly in McKenney’s ideas proved to be a disaster. Indians wanted rifles and our Interest.” The Indians especially needed to see evidence of kettles, not hoes and plows. But since McKenney was funded regularly American strength, so Washington recommended that the government each year by government, regardless of his volume of trade, he had no build and operate a series of fur factories throughout the American incentive to change his tactics. Private traders, however, had to please South and West. With Washington’s support, Congress appropriated Indians or go broke. As private traders grew in numbers and wealth in $50,000 for the new factories in 1795 and raised it steadily in later the early 1800s, one of them, John Jacob Astor, grew so rich he years to a total of $300,000. Such a subsidy was a large expense for a surpassed the government factories in capital, influence, and volume of new nation, and one that tested government’s ability to act as an business. entrepreneur. Here is how the factory system worked. The government created a John Jacob Astor: Risk-Taker and World Trader bureaucracy—the Office of Indian Affairs—to conduct the fur trade. It used the $300,000 from Congress to set up trading posts (usually near Astor, the son of a German butcher, came to the United States in military forts), stock them with goods, and pay agents to buy, store, and 1784 at age 20 to join his brother in selling violins and flutes. Soon, transfer furs from the trading post to Washington, D. C., where they however, he changed his tune. He became fascinated with the fur trade would be sold at auction. Once the factories were funded, they were and studied it day and night. He learned prices, markets, and trade supposed to be self-supporting, and perhaps, as Washington said, “bring routes for all kinds of pelts. The fur territory—New York, Montreal, and in a small profit.” Agents in the factories would use the first batch of the American Northwest—he traveled and mastered. Astor bought and goods to buy furs; then when the furs were sold, the agents could buy sold cautiously at first, then with more confidence as the profits rolled more goods and repeat the cycle. in. He was an odd man to be such a risk-taker. He was quiet, almost secretive, in his business dealings. Astor had a keen mind for enterprise, Thomas McKenney and the Office of Indian Affairs but he spent years at a time out of the United States, estranged from his Almost from the start, however, the factory system struggled. Well wife and fighting bouts of depression. He was both decisive and patient. into the 1800s, the British companies were trading actively throughout He had a vision of how America would grow, how the fur trade fit into the Great Lakes area. So were private American traders. The factories that growth, and how to market furs around the world. With were so poorly run that many Indians held them in contempt and commanding vision and masterful detail he could profitably buy furs in refused to trade there. In 1816, President Monroe appointed Thomas Michigan, pack them on a boat to New York, ship them to China, and McKenney, a Washington merchant, to take charge of the Office of bring tea back home. Indian Affairs and help the factories expand their business.

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Astor separated himself from others through his foresight and the 90-mile walk through swirling snow to see if the government agent perseverance. If the matrons of France wanted beaver hats and otter in Detroit would give him replacements on credit. coats, and if these animals roamed the forests of New York, that was all Astor built on this advantage by trading the best supplies he could most traders cared to know. Astor, however, thought more of world find at reasonable rates of exchange. Indians wanted guns and blankets, trade. Europeans liked to fight each other and wars disrupted markets; for example, and Astor supplied them at low cost. The best blankets he why not expand and sell furs to the Chinese—not for fashion, but for could find were British-made blue-striped blankets, and Astor bought warmth in their unheated houses? Besides, he could bring the tea back them at 15 percent less than McKenney paid for lower quality blankets from China and profit at both ends. made in America. Astor bought British Tower muskets, the best on the The large market of the Far East prompted Astor to turn his sights market, for about $10 apiece, but McKenney paid $12.50 apiece for west to Michigan. New York and the Atlantic Coast were depleted of furs Henry Deringer’s muskets made in Philadelphia. by the early 1800s. The Great Lakes area—especially the Michigan One reason Astor succeeded was that he accepted the Indians as Territory—then became the heart of the fur trade, yielding thousands of they were, not as he wanted them to be. If they desired axes, kettles, and skins for coats and rugs all over the world. Astor founded the American muskets, he tried to find the best available and sell to them at Fur Company in 1808 and made his move to challenge the government competitive prices. He respected Indians as shrewd traders and knew factories. he had to have the best goods to get the most business. McKenney, as Under Astor, the American Fur Company resembled a modern we have seen, squandered government resources on goods Indians corporation with specialists, division of labor, and vertical integration. didn’t want. Astor ran the company from his headquarters in New York. Mackinac McKenney refused to sell liquor in government factories and urged Island was the center of the actual trading, where most furs were Indians to be sober, virtuous, and industrious. “The same devotion to bought, packed on boats, and sent to the East Coast. Astor’s agents the chase, and those irregular habits which have characterized the sons dotted the rivers throughout the Northwest and they had log cabins of our forests yet predominate,” he lamented. well-stocked with goods. They supplied the company’s fur traders, who would live with the different Indian tribes and supply them with goods Liquor was also an item Astor preferred not to supply, even though and credit as needed. he knew many Indians wanted it. Not that Astor was a moralist; he was a realist. Drunken trappers gathered no pelts, he discovered. If the factories had been his only competition he probably wouldn’t have Astor’s Advantage traded liquor at all. But the traders with Britain’s Hudson’s Bay In conducting business this way, Astor differed from McKenney and Company carried so much liquor they could almost have created the government factories. McKenney and his predecessors just built another Great Lake with it. Astor thus concluded that for him to be trading posts, stocked them with goods, and expected the Indians to competitive he needed to have some liquor available for trade. come there to trade. Many Indians, however, lived hundreds of miles from a factory and had no supplies to trap with. Even if McKenney had Motivation and Marketing given credit easily, and had known whom to trust, the Indians would have been hampered by distances. Under Astor’s system, the fur traders Trade was not the only area where Astor outmaneuvered the lived with the Indians, learned whom to trust, and bought and sold on government factories. The motivating of men was another. Astor used a the spot. If an Ottawa brave capsized his canoe and lost his musket and merit system and paid his chief managers good salaries plus a share of powder, he could get replacements from Astor’s local trader and avoid the profits. This guaranteed an attention to detail, which Astor needed to stay on top. McKenney and his staff, by contrast, received a standard

168 A Republic—If We Can Keep It John Jacob Astor and the Fur Trade: Testing the Role of Government 169 salary from Congress with no bonuses given in profitable years or cuts in order that . . . [the Indians] may be protected against the fraud and given when trade fell. the violence to which their ignorance and weakness would, without One final area of Astor’s genius was his marketing savvy. He sold his such prot e ction , expose t he m .” furs at auctions all over the world. If he didn’t get the prices he wanted Even with friends in high places, however, McKenney couldn’t in New York he sent furs to auctions in Montreal, London, Hamburg, and muster the support in Congress to ban private fur trading. He therefore Canton. McKenney, by contrast, had the furs collected in his factories presented two backup plans. First, the government should increase his sent to Washington. Then he sold them at auction in nearby Georgetown subsidy from $300,000 to $500,000. Second, McKenney wanted to for whatever price they would bring. He didn’t sell in different cities, increase the license fees for his competitors. If he couldn’t ban private nor did he withhold any from the market in bad years. fur traders by law, perhaps he could raise their costs of doing business, Sometime after 1808, John Jacob Astor surpassed the government and thereby improve the competitive position of his factories. factories and emerged as the leading exporter of furs in the United Astor hated to play politics, but he believed he had to be politically States. He widened his lead after the War of 1812. By the 1820s, the shrewd to survive. He wrote President Monroe and explained how the American Fur Company employed over 750 men, not counting the American Fur Company helped the U.S. economy. Other politicians came Indians, and collected annual fur harvests of about $500,000, which to Astor’s aid. Governor Ninian Edwards of the Illinois Territory made it one of the largest companies in America. challenged Calhoun: “For my part, I have never been able to discover, McKenney nervously watched the government’s share of the fur and I defy any man to specify, a solitary public advantage that has trade decline year by year. “Why do the factories lose money?” Congress resulted from it [ the factory system] i n this c o untry.” asked when McKenney came before them each year to renew his sub- From 1816 to 1822, Congress heard from both sides and had sidy. He was embarrassed by Astor’s dominance and perplexed at what frequent debates on the fur trade. For both sides, it was a fight to the to do about it. At one point, he urged his agents, or “factors” as they death. When McKenney’s factories showed a drop in fur sales from were called, to stir up Indians against private traders. “[A]ll correct $73,305 in 1816 to $28,482 in 1819, his case began to weaken. means that may be taken to expel those traders,” McKenney wrote, Astor then took the offensive and urged Congress to abolish the would be “of service to humanity and justice.” whole factory system. His first step was to get Congress to see how By 1818, McKenney had reached a dramatic conclusion: the best unpopular the factories were with Indians. Calhoun, McKenney’s ally, way to beat Astor was to influence Congress to ban all private fur unwittingly cooperated when, as Secretary of War, he helped authorize traders. If this could be done, McKenney could monopolize the fur trade, Jedidiah Morse, a neutral observer and Congregational minister, to go sell the Indians what he wanted them to have, and pursue his dream of into Indian country and report on the Indian trade. amending their heads and hearts. “Armies themselves,” McKenney Morse visited most of the government factories and interviewed the argued, “would not be so effectual in regulating the native Inhabitants men who worked in them as well as the private traders nearby. In his as would a state of dependence on the Government for their commercial report he came down clearly against the factories. “In the first place,” intercourse.” Sure, McKenney admitted, a monopoly “embraces the idea Morse wrote, “I have to observe that the Factory system . . . does not of compulsion. But the power over the Indians is covetted [sic] only for appear to me to be productive of any great advantage, either to the their goo d —and also to prevent them from doing harm.” Indians themselves, or to the Government.” This conclusion was dev- John C. Calhoun, Secretary of War and later vice president, was astating because it revealed that the factory system had failed to do swayed by McKenney’s ideas. “The trade should,” Calhoun wrote, “as far what Washington set it up to do—impress the Indians, gain their as practicable, be put effectually under the control of the Government, respect, and challenge the British in the Northwest Territory. Morse

170 A Republic—If We Can Keep It John Jacob Astor and the Fur Trade: Testing the Role of Government 171 further wrote that “the Indians, who are good judges of the quality of Critics demanded answers and Congress formed a committee to the articles they want, are of the opinion that the Factor’s goods are not investigate the unprofitability of the factories. They sifted through so cheap, taking into consideration their quality, as those of private mountains of records and interviewed lines of witnesses. McKenney traders.” was on the spot and had to testify, but the committee found no Morse was not completely pleased with private traders. They traded corruption, just inexplicable losses. The factory system just failed, the too much whiskey, he wrote, and they gave Indians too much on credit, committee concluded, but it needed to be studied “not only as a matter which weakened their work ethic. But he couldn’t deny their success or of curious history, but for the lesson it teaches to succeeding the “want of confidence in the Government . . . expressed by the Indians legislators .” in my interviews with them.” Astor, meanwhile, continued to expand and prosper. New Armed with the Morse report, Astor’s allies in Congress moved to companies entered the fur trade during the 1820s and existing ones abolish the factories in 1822. Thomas Hart Benton, the new senator continued to challenge Astor. The competition was keen and Astor’s from Missouri, had been a lawyer for Astor and knew the fur trade well. volume of business varied from place to place. The American Fur On the Senate floor he ridiculed McKenney’s purchases, particularly the Company, however, remained the largest firm in the field after the eight gross (1,152) jew’s harps he had recently sent to the factories. factories were closed. Astor, better than any American before him, had What use, Benton asked, could Indians have for jew’s harps? “I know!” mastered the complex accounting and organization needed to conduct a he said sarcastically. “They are part of McKenney’s schemes to amend worldwide business. the heads and hearts of the Indians, to improve their moral and intellectual faculties, and to draw them from the savage and hunter Astor and McKenney: An Epilogue state, and induct them into the innocent pursuits of civilized life.” By the late 1820s and into the 1830s, the fur trade began to decline. Astor always knew the trade couldn’t flourish forever—furs were being The End of the Factory System collected faster than new animals were growing them. Changing tastes Not surprisingly, Benton urged Congress to end the factory system. slowed down business even more than the scarcity of animals. As Astor Most Congressmen agreed. The Senate voted 17 to 11 to end the noted from Paris in 1832, “they make hats of silk in place of Beaver.” factories, and the House soon followed. On May 6, 1822, President Also, the Industrial Revolution and the popularity of cheap, mass- Monroe signed Benton’s bill. produced clothing shut down markets for furs. “[M]any articles of manufacture which are now very low can be used in place of deer skins The closing of the factories was a story in itself. The merchandise & furs,” Astor observed in 1823. “[T]hey receive of course the inside them was to be collected and sold at auctions around the country. preference.” Evidently it didn’t occur to Astor to try to get the The money received would then be returned to the government to government to handicap or eliminate his competition. offset the $300,000 federal subsidy. The auctions themselves, which became the true test of the market value of the articles in the factories, In 1834, three years before Michigan became a state, Astor quit the brought grim news. The government, on its $300,000 investment, fur business and sold the American Fur Company. He was 71 years old received a return of only $56,038.15. As Senator Benton had said, The and ready to do less strenuous work. The same skills that made him factory system grew out of a national calamity, and has been one itself. America’s largest fur trader also made him profits in New York real estate. For many years, Astor had been buying lots in northern Many Congressmen were astounded at the waste of government Manhattan, developing the property, and selling it at a profit. This he funds revealed by the auctions. If Astor could make millions of dollars continued to do. He also invested in the Park Theatre, the Mohawk and trading furs, how could the government lose hundreds of thousands?

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Hudson Railroad Company, and the Astor House Hotel. By the time of his death in 1848, he had accumulated America’s largest fortune, about $10 million. The last years of McKenney’s life were not so pleasant. Outside of 33 government, he struggled as a businessman, writer, and lecturer. His wife died, and his son became a wastrel. McKenney lived out of his suitcase, borrowing money and moving from city to city. In 1859 he died, at age 73, destitute, in a Brooklyn boarding house. —BWF, June 1997

For readers interested in learning more about Astor and McKenney, the author recommends John Denis Haeger, John Jacob Astor: Business and Finance in the Early Republic (Detroit: Wayne State University Press, 1991); and Herman J. Viola, Thomas L. McKenney: Architect of Chapter Thirty-Three America’s Early Indian Policy, 1816–1830 (Chicago: Swallow Press, 1974). Why Did the National Road Fail?

“Let’s build a national road across the country!” many Americans cried in the early 1800s. The idea of a national road was appealing because it would encourage settlement by connecting the east coast with the interior of the recent Louisiana Purchase. So popular was the idea that in 1806, Congress voted to fund such a road, and Thomas Jefferson signed the bill. Constitutional arguments were important in this debate. Those who favored the road argued that it was a “post road” for mail delivery, and thus was consistent with Article 1, Section 8, of the Constitution. But would the national road—which would eventually stretch from Cumberland, Maryland, to Vandalia, Illinois—be economically sound? Put another way, even if the road was a good idea, was government funding the best means to achieve it? After more than 700 miles and $7 million in construction costs, we can answer that question. No, the national road was not sound. Nor was it particularly helpful to westward settlement. By 1850 it was little used, and soon after that it was almost abandoned. What went wrong and why?

173 174 A Republic—If We Can Keep It Why Did the National Road Fail? 175

Three problems inherent in government funding help explain why For example, Lt. Henry Brewerton of the Corps of Engineers the national road largely failed. inspected the road in Ohio and found inferior mortar and materials in First, when government money is used to build a road, political its construction and tree stumps scattered throughout. Brewerton decisions, not economic ones, dictate where it is built. In other words, echoed those who claimed the road fell into disrepair faster than it congressmen with political pull will try to draw the road to their could be built. Western travelers moaned constantly about the bumpy districts, whether that route is economically sound or not. As the rides, the steep grades, and the mudslides. David Shriver, the national road moved north and west from Cumberland to Wheeling, superintendent of the road, complained that travelers stole bridge (West) Virginia, it detoured through Union-town and Washington, walls, milestones, and building materials. Lucius Stockton, who traveled Pennsylvania. Why? Because Jefferson’s treasury secretary, Albert the whole of the road and tried to run a passenger service on it, said, Gallatin, lived in Uniontown, and he persuaded Jefferson to swing the “Generally speaking the surface is entirely destroyed, or sunk under the road there. Gallatin also urged Jefferson to run the road on a northern foundation. . . . In one place the foundation itself has been carried away.” detour into vote-rich Washington County during an election year. “[T]he R. J. Meigs, the U.S. Postmaster General in the 1820s, found the road county of Washington,” Gallatin wrote Jefferson, “with which I am well almost impassable and the mail, therefore, almost undeliverable. So acquainted, having represented it for six years in Congress, gives a slow and erratic was federal mail delivery on it that many merchants uniform majority of about 2000 votes in our favor and that if this be along the road used private couriers to ensure speedy and reliable mail thrown, by reason of this road, in a wrong scale, we will infallibly lose service. the State of Pennsylvania in the next election.” Jefferson responded curtly that “a few towns in that quarter [of Pennsylvania] seem to consider all this expense as undertaken merely for their benefit.” But he Express Mail Started still sanctioned Gallatin’s detours. How ironic! Using the national road as a federal post road was the Second, when the government builds a road, it will cost more than if key to making it constitutional—yet privatized mail service regularly entrepreneurs build it. The national road was built with stone (crushed outperformed the U.S. Post Office. In desperation, the Post Office added and solid), and it became one of the most expensive roads, if not the “express mail” service to try to compete with private couriers on the most expensive, in the United States in the early 1800s. For example, road, but even that often proved to be slower and more irregular than the privately funded Lancaster Turnpike, also built with stone, cost the private couriers. Angry residents along the road and elsewhere sent $7,500 per mile—versus $13,000 per mile for the national road. The express-mail letters postage-due to congressmen complaining about the builders of the Lancaster Turnpike were spending their own money and poor service. Reeling from an avalanche of hostile letters, the had to spend it wisely, or the tolls would not cover their expenses. Postmaster General instructed all postmasters not to deliver any Those in charge of the national road, by contrast, were political express mail postage-due to “the President or any head of dep artment.” appointees, described by one newspaper editor as being “as numerous By the 1830s, therefore, many congressmen were having second as the locusts of Egypt.” Funded with taxpayer dollars, the national road thoughts about using federal funds for the national road. Some of them, never charged tolls, so it never had to turn a profit. like John Campbell of South Carolina, asked, “Who can suppose that the This leads to the final point. Because no one owned the national opening of roads by the government is necessary to attract the farmer road, no one had a strong stake in building it well, or preserving it once to the virgin soil of the West?” Other roads, built by the states or by it was finished. Almost every firsthand account we have suggests that entrepreneurs, also brought immigrants westward. These roads were the road was shoddily constructed. Even in its heyday it was never fully clearly constitutional, and they needed no federal tax dollars to operate. paved; it always had gaps and always needed repairing. The U.S. government, therefore, began in the 1830s to give pieces of the national road to the states in which they were located. Pennsylvania

176 A Republic—If We Can Keep It and Maryland, however, refused to accept their pieces even as gifts until they were repaired and made more usable for travel. By 1840, railroads had emerged, and the national road, even the serviceable parts, was becoming obsolete. But it did serve a useful purpose in teaching Americans this lesson: federally funded transportation is neither a 34 necessary nor a desirable way to fill a continent with settlers. —BWF, July 2004

Chapter Thirty-Four

Should Government Build the Railroads?

On July 12, 1831, President Andrew Jackson, who was no prankster, did something that made many people laugh, some curse, and others rub their eyes in disbelief. He appointed 19-year-old Stevens T. Mason to be secretary and acting governor of the Michigan Territory. Granted, Mason was a very intelligent teenager and his family was nationally prominent. But surely, his critics wondered, this was the worst case of political patronage ever seen. During the next ten years, however, the youthful Mason would often vindicate Jackson’s judgment. Mason went from acting governor to elected governor. He plotted the strategy that brought Michigan into the Union, and he made deals that defined Michigan’s boundaries on two peninsulas. Unfortunately, he also launched a gigantic scheme of state-run railroads and canals that almost bankrupted the state. As a result, Michigan voters went to the polls en masse to make their state a haven for free enterprise for the rest of the century. The Mason story begins not in Michigan, but in New York, along a remarkable ditch that was dug in the 1820s. The Erie Canal, an astonishing achievement in engineering, had a big impact on American 177 178 A Republic—If We Can Keep It Should Government Build the Railroads? 179 thinking. Here we had a canal 364 miles long that connected the Great After this constitution was adopted, Mason publicly supported an Lakes with the Atlantic coast—and it was built not by entrepreneurs activist state government. “The spirit and enterprise which has arisen but by the state of New York. Suddenly New York City could trade with among our citizens, if fostered and encouraged by the State, cannot fail farms and cities throughout the midwest. Profits from tolls flowed into to lead to lasting prosperity,” Mason said. By 1837, three weeks before the state, and the whole Great Lakes region was open to settlement and Michigan entered the Union, Mason was more urgent: “The period has trade. arrived when Michigan can no longer, without detriment to her Shortly after 1825, tens of thousands of New Yorkers and New standing and importance as a state, delay the action necessary for the Englanders filtered into Michigan via the Erie Canal. Governor Mason development of her vast resources and wealth.” He was also optimistic: himself used the Erie Canal eagerly when he had to go to Washington to “we cannot fail soon to reach that high destiny which awaits us. I . . . see President Jackson. Almost everyone in Michigan gushed with praise demand immediate legislative action.” for this new canal, which brought them immigrants and took their With Mason leading the cheers, the legislature met and almost exports. The message seemed obvious: states that want to get ahead unanimously passed an elaborate internal improvements bill. need active governments to tax their citizens to build a transportation Democrats and Whigs alike joined in the public support for it. When the network. alternate strategy of private ownership came up, Mason recommended To compete with New York, for example, Pennsylvania spent $14.6 that the canals and railroads “should never be beyond at least the million on its Main Line Canal from Philadelphia to Pittsburgh. partial control of the state.” “Extortion from the public” was what Maryland and Massachusetts joined in the rush with a variety of state- Mason called one bill to charter a private railroad. Most Michiganians supported projects. Illinois and Indiana began elaborate canal networks seemed to agree. The Detroit Daily Advertiser noted that “Dewitt Clinton in 1837, just when Michigan entered the Union. This was when . . . built the [Erie] Canal with the funds of the state. What would be railroads were being built, and some states began to lay track and buy thought of the policy of surrendering that great work to the control of a locomotives. private corporation[?]” The example of the Erie Canal had become the ace that trumped all opposing arguments. And if one state subsidy was good, two must be The State as Creator better, and three better yet. Michiganians were so confident that state To Mason this was all exhilarating. Maybe the traditional theory of projects would flourish that they promised to build two railroads from limited government was wrong. Maybe states could be creators, at least Lake Erie to Lake Michigan, and a couple of major canals across the in the area of transportation. And after all, it was state governments, not state as well. the one in Washington, that were building these canals. Even as territorial governor, Mason urged Michigan to lay the Bad Luck, Bad Judgment foundation for the state to build internal improvements. When delegates met in 1835 to write the Michigan constitution, they—with Mason thought the state should spend $5 million to build these Mason’s encouragement—wrote the following into law: projects. Actually, that was just start-up money. As soon as the anticipated tolls started pouring in—as happened with the Erie Canal— Internal improvements shall be encouraged by the government of the state could then build more. The legislature approved the $5 million. this state; and it shall be the duty of the legislature, as soon as may Then the legislature authorized the governor to negotiate a $5 million be, to make provisions by law for ascertaining the proper objects of loan with the lender of his choice under the best terms he could get, as improvement, in relation to [roads], Canals, and navigable waters. . . long as he didn’t exceed 5¼ percent. The state, in this arrangement, . would issue bonds for the $5 million and pay them back as tolls came in In other words, Michigan’s constitution almost required the state to from the railroads and canals. fund internal improvements.

180 A Republic—If We Can Keep It Should Government Build the Railroads? 181

Bad luck was the first problem to strike. The national economy went into a tailspin—the Panic of 1837—and capital was hard to borrow. Then came distractions. While in New York to talk with investors and study the bond market, Mason became sidetracked by Julia Phelps, the The Michigan Central Railroad daughter of a wealthy leather merchant, Thaddeus Phelps. Mason The two railroads also had problems. The Michigan Central was to courted and married her in 1838. go from Detroit west through Ann Arbor, Jackson, and Kalamazoo and Then came bad judgment. Businesses were failing because of the on to St. Joseph on Lake Michigan. Boats at St. Joseph could then take panic, and most sound investors wanted more than 5¼ percent for their freight or passengers to Chicago and back. The route went through money. Mason finally persuaded the officers of the Morris Canal and prosperous wheat farms and the state’s larger cities, but poor Banking Company, a reputable firm, to buy the Michigan bonds. They construction and management of the road drained most of its profits promised to pay him the $5 million in regular $250,000 installments each year. The Central was built with strap-iron rails, which consisted over several years. Mason gave them the bonds and went back to of thin strips of iron strapped onto wooden rails. These rails were too Michigan with their promise. The Morris Company turned most of the fragile to carry heavy loads. Rather than switch to the more expensive bonds over to the Pennsylvania Bank of the United States, which then and durable T-rails, the Board of Internal Improvements chose to run sent them to Europe as collateral for its own investments. Within three regular heavy shipments over the existing tracks and repair them years, both the Morris Company and the Pennsylvania Bank went broke, frequently. Not only was this practice dangerous, it was more costly to leaving Michigan with a $5 million debt scattered among European the state in the long run. investors. Robert Parks, who wrote a detailed book on Michigan’s railroads, found a deplorable situation on the Central: The Clinton-Kalamazoo Canal [O]verloaded locomotives were run at twice the recommended safe speed. Under the strain of continuous operation and jarring impact An even greater disaster were the projects Michigan built. First was of high speed on strap-iron rails, locomotives and cars were shaken a canal that was to begin in Clinton Township near Detroit and extend to pieces, and the cost of operation mounted dramatically. Rails 216 miles west to Kalamazoo. The Clinton-Kalamazoo Canal began with were broken and timbers crushed under the heavy loads bouncing high hopes and much fanfare. Mason broke ground in Mt. Clemens in over their surface. 1838 to celebrate the start of digging. Bands, parades, speeches, and a 13-gun salute commemorated the occasion. Then came reality. The By 1846, the Central had been extended only to Kalamazoo. It had Board of Internal Improvements, which Mason appointed to supervise technically been profitable each year, but did not earn enough to pay for the projects, hired different contractors for each mile of the canal, and needed repairs and new rails. these contractors each had different ideas on how to build a canal. One thing they all did wrong was to make the canal only 20 feet wide and The Michigan Southern four feet deep—too shallow for heavy freight and too narrow fo r easy passing. The second railroad, the Michigan Southern, was to parallel the Central in the southern tier of counties from Monroe to New Buffalo. After seven years and only 16 miles of digging, the ledger for the Financially, the Southern was a stunning failure. It had the same unfinished canal read: “Expenses $350,000, Toll Receipts $90.32.” With problem as the Central, with heavy loads on strap-iron rails. What’s funding scarce, the board decided sometime around 1843 to cut its worse, the Southern was built poorly: the roadbed was shaky and the losses, abandon the canal, and focus on the two railroads. When curves too sharp for locomotives. Monroe, on Lake Erie, proved to be construction on the canal stopped, some workers went unpaid and they too shallow a port for heavy freight to enter or exit. Also, the towns stole materials from the three locks on the canal. Soon even the west of Monroe were too small to send much traffic on the Southern. By completed parts of the canal were ruined.

182 A Republic—If We Can Keep It Should Government Build the Railroads? 183

1846, the road had only reached Hillsdale, about half-way across the The price for these votes was a commitment to build canals in Mt. state. It had cost over $1.2 million to build that far and its earnings were Clemens and Saginaw and a railroad in Monroe and Hillsdale. small. The road did little to move goods or people across the state; it drained capital that could have been used more wisely. Political Manipulation Michigan spent almost $4 million on the Clinton-Kalamazoo Canal, the Michigan Central, and the Michigan Southern. The state spent about Mason actually saw this problem early and tried to stop it by $70,000 surveying the Michigan Northern Railroad, from Port Huron to centralizing power in the Board of Internal Improvements. The board’s Lake Michigan, before abandoning it. It also spent $47,000 clearing the decisions, however, proved to be just as politically motivated as the route for a canal and turnpike near Saginaw. Officials soon quit the legislature’s. Many legislators pressured (and possibly bribed) project, and the materials “either rotted or were expropriated by local members and some secretly made money from projects. residents.” The story of Levi Humphrey is a case in point. Mason appointed Many of these problems occurred after Mason’s terms as governor, Humphrey, a key Democrat in the state, to the board. When Humphrey but he received most of the blame because he had touted the projects took bids for constructing the Michigan Southern, he manipulated the and signed the loan. In 1837, he had narrowly won re-election, but in results to assure that his friends in the firm of Cole and Clark won the 1839 his Whig critics were loud and brutal. Mason chose not to seek a contracts. Cole and Clark then charged three to four times the market third term. By that year he had begun to consider if the problems with price for supplies. When the complaints reached the legislature, Cole the projects were more than just bad luck or poor management. Maybe and Clark used some of their profits to bribe witnesses. The Whigs the state should never have drifted into economic development. In complained loudly, but when they won the governorship in 1839, they Mason’s final address as governor, he said: did not do much better. In 1840, the board overspent its budget and covered it by falsifying its records. [T]he error, if error there is, was the emanation of that false spirit of the age, which forced states, as well as individuals, to over-action The problem was not just corruption; it was human nature. Officials and extended projects. If Michigan has overtasked her energies and did not spend state money as wisely as they would have spent their resources, she stands not alone, but has fallen into that fatal policy, own. If Mason, for example, had been a wealthy industrialist, would he which has involved in almost unparalleled embarrassments so have invested $5 million of his own money with bankers he hardly many of her sister states. Now, however, the period has arrived, knew during a national depression? Would any of the legislators have when a corrective should be applied to the dangers which seem to done so? surround her. The spending policies of the board raise similar questions. In 1838, A “false spirit of the age,” Mason said, may have moved states into for example, it had a bridge built over the River Rouge. The problem the “fatal policy” of funding state projects. Michigan had too many was that the bridge they decided to build could not carry heavy freight. railroads and canals and too few people to pay for them. But, as Mason The Central, not the builders, lost almost $10,000 that year hauling had begun to realize, in a state-supported system this result would have passengers and freight around the bridge. Since no individual owned been hard to avoid. The funding must come through the legislature, and the bridge, no one had a direct financial stake in building it well—or the legislators naturally wanted projects in their districts. Jobs and even protecting it. The next year an arsonist destroyed the bridge. markets were at stake. Some historians have suggested that if the In another example, the board ordered iron spikes for the Michigan Michigan Central had been the only project built, the strategy of state Southern in 1841. The contractors, however, only put one spike in every funding might have worked. But this was politically impossible. The other hole along the track. They stole the rest of the spikes and, when legislators in the towns along the Central—Detroit, Ann Arbor, and questioned, they persuaded the board that the unused spikes were Kalamazoo—needed votes from elsewhere to have their railroads built. defective. The board did not own the spikes or even have to ride on the

184 A Republic—If We Can Keep It Should Government Build the Railroads? 185 rickety railroad that resulted; they simply believed the contractors and policy of states.” Barry argued that “in extraordinary cases only . . . left the track partly unspiked. should a state undertake the construction of public works.” He The Boy Governor, no longer a boy, left office in 1840 at age 28. He continued: “Seeing now the errors of our policy and the evils resulting had served almost nine years as secretary, acting governor, and elected from a departure from correct principle, let us with the least possible governor. During this time, he had focused so intently on administration delay correct the one by a return to the other.” that he had left office almost penniless. He decided to leave Michigan for Thomas Cooley, Michigan’s most prominent lawyer in the 1800s, New York City, his wife’s home, and make his fortune there in law and observed firsthand the way the state ran its railroads. In a history of the business. As he entered Buffalo and made his way across the Erie Canal state, he wrote, “Doubts were arising in the minds of the people to New York City, he may have wondered why the experiment with an whether the state had been wise in undertaking the construction and active government worked so much better in New York than in management” of internal improvements. “These doubts soon matured Michigan. During the next two years, however, if Mason studied local into a settled conviction that the management of railroads was in its politics, he saw New York repeat Michigan’s experience. State nature essentially a private business, and ought to be in the hands of legislators in districts outside the Erie Canal area had won eight new individuals. By common consent it came to be considered that the state canal projects at a cost of $9.4 million. These new canals failed in entering upon these works had made a serious mistake.” miserably and caused an economic collapse in the state, forcing eight By 1846 Governor Alpheus Felch, who had followed Barry, carried banks to close and new taxes to be imposed. the day for privatization. “The business of transporting passengers and Pennsylvanians did even worse. They spent $14.6 million on a risky freight by railroad is clearly not within the ordinary design of state canal from Philadelphia to Pittsburgh. The large losses on it each year government,” Felch observed. The legislature finally agreed and voted helped force the state into default on its bonds. Several other states also to sell the state’s public works in 1846. The state took bids and sold the defaulted on their internal improvement bonds, which damaged U.S. Central for $2 million and the Southern for $500,000. As a result, credit abroad and made Michigan look better. How much attention Michigan recovered 90 percent of its investment in the Central and 44 Mason paid to this we don’t know. He died of scarlet fever on January 5, percent in the Southern. If the losses on the canals and other projects 1843, at age 31. are included, the state—through this sale—recaptured about 55 Mason was gone, but his “false spirit of the age” speech in 1840 had percent of its total investment in internal improvements. This decision reopened the debate in Michigan on the role of the state in economic helped the state cut its bureaucracy and also avoid bankruptcy. development. Right from the start, the government lost money building As a condition of the sale, the new railroad owners had to agree to and operating the state’s system of canals and railroads. William rebuild both lines with quality rails and extend them to Lake Michigan Woodbridge, the governor who followed Mason, first suggested selling within three years. It had taken the state nine years to move the lines the railroads to entrepreneurs and getting government out of the not much more than half-way across the state; the new entrepreneurs internal improvements business. At first, many resisted the idea. had to rebuild that part and complete the rest in just three years. When Legislators wanted railroads in their districts at taxpayer expense; they they did so, while keeping rates competitive, Michiganians knew they worried that entrepreneurs would build them elsewhere. had learned something. They moved quickly to write this discovery into law. “The Errors of Our Policy . . .” As the number of blunders on the projects began to multiply, A New Constitution however, more pressure came for the state to privatize. John Barry, who The next year, 1850, Michigan held a state constitutional was elected governor after Woodbridge, echoed Mason and talked convention. The proper role of government was one of the issues. The about “the spirit of the times unfortunately [becoming] the governing 1835 constitution, which mandated government support for internal

186 A Republic—If We Can Keep It improvements, was changed to include this: “The State shall not subscribe to or be interested in the stock of any company, association, or corporation.” Further, “the state shall not be a party to or interested in any work of internal improvement, nor engaged in carrying on any such work” except for the donation of land. 35 The public debate that followed showed much support for the new constitution. “Looking at it as a whole,” said the Grand Rapids Enquirer, “we honestly believe that if it had been adopted at the organization of our State Government, our State would now be out of debt, prosperous, and flourishing.” In November 1850, the voters of Michigan overwhelmingly accepted the new constitution. Michigan had learned from its history. The building of railroads and the development of resources—lumber, copper, and chemicals—would be done by private enterprise. —BWF, June 1998

Chapter Thirty-Five

Death by Public Works

Almost all historians who write on the New Deal praise Franklin Roosevelt for using government to “solve” economic problems. Often, however, these historians only tell part of the story. One example is Roosevelt’s vast public-works program. Here most historians wax eloquent on the dams built by TVA, the roads built by WPA, and the bridges built by FERA and CCC. What the historians omit are the high taxes levied for these projects, the sometimes inept construction, and the behind-the-scenes politics where votes were traded to bring projects to the district s of powerful congressmen. In some cases, New Deal programs not only failed, they also had death rates along the way. For example, there’s the story of how Roosevelt sent World War I veterans to build bridges in the hurricane country of south Florida. At least 256 of these veterans died in FERA (Federal Emergency Relief Administration) camps in the Florida Keys, where they were sent in hurricane season with poor provisions and no plan of retreat or rescue.

187 188 A Republic—If We Can Keep It Death by Public Works 189

The hurricane tragedy had its origin in a seemingly shrewd political hurricane w a rning should occur. Ghent never received a respon se from decision by FDR. Unemployed veterans had been difficult to deal with. Washington, and in the absence of instructions he took no action. Ever since World War I they had campaigned in Congress for a special Trouble began in late August with weather reports of possible “bonus” for their service. In 1932 they put pressure on President hurricanes coming toward Florida. On Sunday, September 1, at 10 a. m. Hoover by traveling to Washington, camping near the White House, and a weather bulletin reached Key West warning of hurricane danger. publicizing their demands for immediate payment for their wartime Residents 20 miles west boarded their houses. The owner of the Hotel service. In a political blunder, Hoover decided to restore order among Matecumbe, who was within one mile of the veterans’ camps, boarded the rowdy veterans by sending Douglas MacArthur to confront them his hotel as well. Ghent was in Miami. The following day he finally sent a with cavalry, infantry, and six tanks. MacArthur decided to fire on them Florida East Coast Railway train to the veterans’ camps. The railroad and disperse their camp—and photos blanketed the country showing was in receivership and many crewmen were unavailable because of the fleeing vets under fire from their own government. It was an the holiday weekend. That day a severe hurricane hit the Keys and election year, and when Roosevelt, then the Democrat candidate, saw knocked the train off the tracks before it ever made it to the FERA the pictures and news reports, he reportedly told Felix Frankfurter, camps. “Well, Felix, this will elect me.” When the full force of the hurricane hit the camps the carnage Once in office, Roosevelt was determined not to repeat Hoover’s began. First-hand accounts among the few survivors reveal part of the mistake. Protesting veterans were not allowed to camp in Washington. horror: “There was a big wall of water—15 feet high—20, maybe,” They were directed to Ft. Hunt, Virginia, where they received offers to reported one veteran. It swept over those shacks and messed them up work in CCC (Civilian Conservation Corps) and FERA camps for $1 a day like they were match boxes.” Another reported, “I heard William Clark plus food and shelter. Thousands of veterans accepted this offer, and holler that the roof [of the canteen] was coming down. We all started Roosevelt sent them far away from Washington to camps in South away in the same direction and the roof came down on us. It must have Carolina and Florida. In December 1934, over 400 veterans were hit every one of u s. After the roof fell all I could hear was the grunting specifically transferred to the Florida Keys, where they were told to and groaning of the boys. I never saw any of them after that.” build bridges and roads that would help connect the 90-mile area from Miami to Key West. After hours of the swirling hurricane one survivor said, “[B]odies were lying all over the roadway and lumber piled on them and some of Roosevelt’s plan to export the contentious vets to Florida was them had holes in their heads.” In the aftermath another said, “I saw clever, but Harry Hopkins and FERA officials in Washington tended to bodies with tree stumps smashed through their chests—heads blown ignore the veterans once they were out of the capital. In Florida, Fred off—twisted arms and legs torn off by flying timber that cut like big Ghent, the director in charge of the three camps of 400 veterans, had knives.” When the body parts were finally re-assembled the total count trouble, first, getting supplies and, second, enlisting help in preparing was 256 veterans dead. As Time magazine reported, “[I]t was slaughter for hurricanes. The veterans were housed on low land, almost at sea worse than war.” level, in tents and flimsy barracks with poor food, inadequate supplies, and no water for bathing. They had n o serious shelter to protect them from a hurricane or even high tides. Roosevelt Administration Takes Heat In April, three months before hurricane season, Ghent became When the news of the deadly hurricane reached Washington, many concerned about the possibility of storms. He wrote FERA in newspapers began criticizing the President and FERA. Hopkins denied Washington that “this area is subject to hurricanes” and “it is our duty . . responsibility, and his assistant, Aubrey Williams, called the tragedy an . to furnish a safe refuge during a storm.” Specifically, he requested that “act of God.” The Washington Post, however, disagreed. “In spite of a solid two-story warehouse be built and arrangements be made with Relief Administrator Hopkins’ denial that his organization was negligent the Florida East Coast Railway to transport the men out of the Keys if a in failing to evacuate the veterans on the Florida Keys, there is

190 A Republic—If We Can Keep It considerable evidence to support Governor [David] Sholtz’s conclusion that ‘gross carelessness somewhere’ was responsible.” D. W. Kennamer, whom the Veterans Administration assigned to investigate the deaths, concluded that “the only extenuating circumstance” for the failure to evacuate the veterans was Ghent’s regret “that his letters to the 36 National Emergency Relief Administration regarding this matter were unanswered.” In the search for responsibility, novelist Ernest Hemingway wrote an essay, “Who Murdered the Vets?” “[W]ho sent nearly a thousand war veterans . . . to live in frame shacks on the Florida Keys in hurricane months?” he asked. “Why were the men not evacuated on Sunday, or at latest, Monday morning, when . . . evacuation was their only possible protection?” Neither President Roosevelt nor Harry Hopkins answered these questions. The tragic deaths of America’s hard-working veterans have almost disappeared from historical memory. Gary Dean Best’s FDR and the Chapter Thirty-Six Bonus Marchers, 1933–1935, is an excellent book, but it is the only one ever written on this tragedy. No U.S. history text I have ever seen even The Origin of American Farm Subsidies mentions the unnecessary deaths of these 256 men in a New Deal project. In the United States how did we go from having no role for the This story needs to be remembered and retold. How can students federal government in farming t o ha ving government inte rtwined in a ll make sound judgments on the proper role of government if they are aspects of farming from planting to harvesting to selling crops? sheltered from the negative unintended consequences of so many failed government programs? The Constitution is clear on the subject. Article 1, Section 8, provides no role for the federal government in regulating American —BWF, March 2007 farmers. And that is the way it was (with rare exceptions) until about 1930. American farmers dominated world markets under the free- enterprise system. They were ever creative in figuring out how to gain larger yields of crops through mechanization or through improving crop strains, such as hybrid corn. Americans have been the best-fed people in the world. Even during times of economic hardship, the federal government largely stayed out of the farm business. For example, during the mid- 1890s, when we had a recession and 18 percent unemployment, the secretary of agriculture, J. Sterling Morton, focused on cutting budgets, not pushing subsidies. He chopped almost 20 percent off his department’s budget, which allowed taxpayers to keep and spend more of their cash, 191 192 A Republic—If We Can Keep It The Origin of American Farm Subsidies 193 rather than sending it to Washington. Morton fired unproductive bureau- would st e p in t o buy the crop, pay to sto re it, and hop e to resell it later crats, starting with a man who held the job of federal rainmaker. He for a decent price. slashed the travel budgets as well. The Farm Board had disastrous unintended consequences for Furthermore, when beet-sugar producers came to Washington almost everyone. For example, many farmers who typically grew other eager for some kind of special help, Morton said, “Those who raise corn crops shifted to wheat or cotton because they were protected and now should not be taxed to encourage those who desire to raise beets. The provided a secure income. The resulting overproduction forced down power to tax was never vested in a Government for the purpose of the prices of both crops below the price floors, so the government had building up one class at the expense of other classes.” to buy over 250 million bushels of wheat and 10 million bales of cotton. That philosophy, written in the Constitution by men who were The costs of buying and storing these crops quickly used up the themselves mainly planters and farmers, governed American farming program’s allotted $500 million. After about two years of buying for about 140 years. Even after World War I, when many farmers had to surpluses, the government finally just gave them away or sold them on readjust from the high prices commanded during the war, Americans the world market at huge losses. were still determined not to tax one economic group to support When Roosevelt became president, he also intervened in the farm another. business, but in a different way. He supported the Agricultural One proposal during the 1920s, the McNary-Haugen bill, would Adjustment Act (AAA), which dealt with the problem of oversupply by have fixed prices of some crops by a complicated bureaucratic system paying farmers not to produce. As for farm prices, they would be pegged and passed the costs on to American consumers. When Congress, under to the purchasing power of farm prices in 1910; millers and processors pressure from some farmers, passed the bill, Coolidge vetoed it. would pay for much of the cost of the program, which of course meant an increase for consumers in t he price of everything from bread to In his veto message, Coolidge echoed major themes of limited shirts. government. “I do not believe,” Coolidge said, “that upon serious consideration the farmers of America would tolerate the precedent of a Two concepts in the AAA are fascinating. First is the idea that body of men chosen solely by one industry who, acting in the name of because farmers overproduce some crops the government ought to pay the Government, shall arrange for contracts which determine prices, them not to grow on part of their land. Second is the idea of “parity,” secure the buying and selling of commodities, the levying of taxes on that farmers ought to be protected from falling prices by fixing them so that industry, and pay losses on foreign dumping of any surplus.” that they were comparable to the purchasing power of their crop in the excellent years 1909–14. Coolidge then added, “There is no reason why other industries— copper, coal, lumber, textiles, and others—in every occasional difficulty Let’s tackle both of these concepts one at a time. First, Supreme should not receive the same treatment by the Government.” He con- Court Justice Owen Roberts voted with most of the rest of the Court to cluded, “Such action would establish bureaucracy on such a scale as to strike down the AAA as unconstitutional. In doing so, he posed the dominate not only the economic life but the moral, social, and political following analogy: future of our people.” Assume that too many shoes are being manufactured throughout The next two presidents, Hoover and Roosevelt, broke the the nation; that the market is saturated, the price depressed, the precedents set by Morton, Coolidge, and 140 years of American history. factories running half-time, the employees suffering. Upon the The Great Depression hit the United States, and both men argued that principle of the statute in question Congress might authorize the others must be taxed so that some farmers could be subsidized. Secretary of Commerce to enter into contracts with shoe manufacturers providing that each shall reduce his output and that Hoover’s program was the Farm Board, which fixed price floors for the United States will pay him a fixed sum proportioned to such wheat and cotton only. If market prices went below 80 cents a bushel reduction, the money to make the payments to be raised by a tax on for wheat and 20 cents a pound for cotton, the federal government all retail shoe dealers or their customers.

194 A Republic—If We Can Keep It

His conclusion echoed that of Coolidge’s almost ten years earlier: “A possible result of sustaining the claimed federal power would be that every business group which thought itself under-privileged might demand that a tax be laid on its vendors or vendees, the proceeds to be appropriated to the redress of its deficiency of income.” 37

Parity for Everyone? In a similar vein, economist Henry Hazlitt challenged the concept of parity by noting that if we gave parity to farmers, why not to other groups? General Motors, for example, was in a deep slump during the Great Depression. Why not a parity price for cars? “A Chevrolet six- cylinder touring car cost $2,150 in 1912,” Hazlitt observed, “an incomparably improved six-cylinder Chevrolet sedan cost $907 in 1942; adjusted for ‘parity’ on t he same b as is as far m products, h owever, it would have cost $3,270 in 1942.” Despite temporary resistance from the Supreme Court and American consumers, the farming industry, even after the Great Chapter Thirty-Seven Depression had long vanished, was and is dominated by the ideas of payments to reduce crops and fixing prices at higher-than-market Lessons from the First Airplane levels. American politicians, under pressure during hard times, sacrificed the Constitution and econo mic sense for v otes a t the ballot Mark your calendars! Prepare for commemorative events and box. feature stories in newspapers all across America. The date is December Once some farmers had their subsidies, they were viewed as 17, 2003—the 100th anniversary of the first manned flight at Kitty entitlements and were hard to take away, even when the farm crisis Hawk, North Carolina, a feat engineered by two brothers named Wright. was over. Perhaps the new Justice Roberts will mark a return to the In one century the airplane went from a dream to a multibillion-dollar earlier Justice Roberts, and the Supreme Court will limit the industry that transports hundreds of millions of people around the government to its historical role as an enforcer of contracts and a globe every year with speed and convenience that would surely protector of private property. astonish Wilbur and Orville today. —BWF, April 2006 Though most Americans know something of that fateful day in 1903, far fewer are aware of the rivalry between the Wright brothers and another inventor/entrepreneur—one Samuel Pierpont Langley. It’s a story that deserves retelling, and there’s no better time to tell it than right now. A hundred summers ago, that rivalry was at a fever pitch, and it wasn’t at all clear at first that the two bicycle mechanics from Dayton, Ohio, would eventually best the distinguished and better-financed Langley. By the close of the nineteenth century the possibility of a man- carrying “flying machine” had captivated visionaries in many countries, 195 196 A Republic—If We Can Keep It Lessons from the First Airplane 197 though the general public regarded the idea as bunk. Nobody knew Meanwhile back in Dayton, Wilbur and Orville Wright worked on enough about aerodynamics to build a craft that could generate its own propeller design, a lightweight engine, and wings that mimicked the power, get up in the air with a man on board and stay there, and be way pigeons flew, as the brothers observed them. What they put flown safely and with precision. together solved the problem of controlling flight, which Langley’s craft In 1878 a simple gift from a father to his two sons—aged 7 and 11— would never have achieved even if it had taken to the air. planted the seed that would change history forever. It was a toy On October 7, 1903, Langley’s plane, with Manly aboard, was ready helicopter made of cork, bamboo, and paper, and powered by a rubber to go. At least that’s what Langley and Manly thought. But the stress of band. Wilbur and Orville Wright were mesmerized. They built their own the catapult launch badly damaged the front wing, and the plane copies and versions of it, fostering a lifelong fascination with flight. tumbled over and disappeared in 16 feet of water. A reporter present Twenty-one years later, in 1899, they took time out from their modest wrote that it flew “like a handful of mortar.” The hapless “pilot” was bicycle shop to begin the work that would lead to the world’s first unharmed. successful airplane. A second launch set for December 8 proved even more disastrous. Langley, meantime, was already way ahead of the Wrights. Born in The rear wing and tail collapsed at the moment of launch, and the plane 1834, he earned an international reputation for his work in physics and dove right into the icy Potomac River. This time poor Manly nearly astronomy and by publishing a book on aerodynamics. He was drowned. Financially, for both Langley and American taxpayers, it was a secretary of the respected Smithsonian Institution in Washington, D.C. total loss. As early as 1896, he had even built and flown an unmanned “aerodrome”—a tandem-wing aircraft that used a lightweight steam engine for propulsion. He was sure he would be the man to invent the Flying Money airplane, and probably deemed it unthinkable that young Critics went wild. James Tobin, author of To Conquer the Air: The whippersnappers from small-town America could come out of nowhere Wright Brothers and the Great Race for Flight (2003), quotes one with little money and beat him to it. congressman as saying at the time, “You tell Langley for me that the Both Langley and the Wright brothers had Smithsonian connections only thing he ever made fly was Government money.” The War but with a huge and perhaps decisive difference. For Langley the Department concluded that “we are still far from the ultimate goal, and Smithsonian was the conduit for a $50,000 federal grant, matched by it would seem as if years of constant work and study by experts, the Institution, to finance his experiments (equivalent to about a million together with the expenditure of thousands of dollars, would still be dollars in today’s purchasing power). As for the Wrights, in 1899 Wilbur necessary before we can hope to produce an apparatus of practical wrote a letter to the Smithsonian asking for nothing more than a utility along these lines.” reading list on flight. He and Orville would finance their dream not with But just nine days after Langley’s second spectacular flight to the government money, but with the nickels and dimes they could scrape bottom of the Potomac, Wilbur and Orville Wright took turns flying from the profits in their private business. their carefully designed plane for as long as 59 seconds over the Outer During the summer and fall of 1903 Langley worked feverishly at Banks of North Carolina. The craft cost them about $1,000. It cost his Washington home base. Because he felt it safest to fly over water, he American taxpayers nothing. Within a year, they were making flights of spent half his money building a houseboat with a catapult to launch his five miles at a time; within two years, they were fly ing distances of 20 to newest craft with a man, Charles Manly, aboard. A catapult launch 25 miles. meant that the plane would have to go from a dead stop to a flying In November 1904 the Wrights offered to sell planes to the War speed of 60 mph in just 70 feet, a feat that would prove beyond the Department. They weren’t seeking a subsidy; they wanted to sell planes reach of his craft’s capabilities. for military reconnaissance and communication. But they received the

198 A Republic—If We Can Keep It same form-letter refusal that the War Department routinely sent to “flying machine” cranks. Now what on earth could be the lesson in this remarkable story? Could it be that government, as some argue, is more farsighted than the private sector and therefore subsidies are needed to spur new 38 inventions? Or that government quickly sees the error of its ways and corrects its mistakes? Or that the pursuit of profit just adds another layer of cost and makes new inventions more expensive than necessary? If you think any of those “lessons” apply, then the textbooks you’ve been reading belong right where Samuel Pierpont Langley’s plane landed. —LWR, July 2003

Chapter Thirty-Eight

Subsidies Hurt Recipients, Too

More than ever, historians need to study the economic consequences of government programs. Only by analyzing the results of past government intervention can we calculate the i mpact o f future government intervention. The Tennessee Valley Authority (TVA) provides a useful example. Established as part of the New Deal in the 1930s, it was a favorite program of Franklin Roosevelt’s. Under the TVA the federal government built dams and generated hydroelectric power for residents of the Tennessee Valley. In the 1920s President Calvin Coolidge vetoed a TVA bill twice, and President Hoover vetoed it once. Both men believed that federal funding was unconstitutional, but FDR disagreed and signed it into law in 1933. Many historians have praised the TVA as a centerpiece of the New Deal. “The TVA,” wrote William Leuchtenburg, dean of New Deal historians, “was the most spectacularly successful of the New Deal agencies, not only because of its achievements in power and flood control, but because of its pioneering in areas from malaria control to library bookmobiles, from recreational lakes to architectural design.” 199 200 A Republic—If We Can Keep It Subsidies Hurt Recipients, Too 201

Most historians have agreed. income p er capita and the ext ent to which the state was served by TVA. . But as TVA grew, some observers noticed problems. Standard . .” bureaucratic inefficiency was one. Second were the Tennesseans who How can receiving a giant dam and reduced costs of electricity had to be relocated because of the flooding of land and destruction of stymie economic development? Chandler concluded that the cheap property. Third were the existing private companies, such as the electricity gave farmers in Tennessee incentives to remain in small- Tennessee Electric Light and Power Company, that had to compete with scale agriculture rather than move into more promising areas of the taxpayer-subsidized TVA. manufacturing, industry, and services. Meanwhile, many farmers in In fact, the taxpayer subsidy for TVA created what economist Henry Georgia and North Carolina improved their education and moved to Hazlitt called an “optical illusion.” “Here is a mighty dam, a stupendous Atlanta, Raleigh, or Charlotte to start or work for businesses. arc of steel and concrete . . . .” Hazlitt observed, “[a]nd it is all presented Chandler further discovered that people in the TVA area were even . . . as a net economic gain without offsets.” slower to adopt and use electricity than were people just outside the But 98 percent of the American population was subsidizing the 2 TVA area. With their ever-increasing incomes, Georgians and North percent in the Tennessee Valley. “Again,” Hazlitt concluded, “we must Carolinians could afford more e lectricity than the more stagnant make an effort of the imagination to see the private power plants, the population in the Tennesse Valley private homes, the typewriters and television sets that were never Chandler’s research should make all students of government allowed to come into existence because of the money that was taken intervention pause. The massive subsidy for the TVA hindered from people all over the country to build the photogenic Norris Dam.” economic growth in the exact area targeted for federal help. If the TVA What appeared to some Tennesseans to be an “economic miracle” example is repeated elsewhere, that is a powerful argument against was merely a transfer of wealth. But the voters in Tennessee made sure government subsidies—perhaps the strongest argument that can be that they protected the TVA subsidy, and it has persisted and increased made (outside the constitutional argument). over time. In fact, the TVA lesson does have widespread applicability. One of The case for the TVA (voters improving their lives through a federal America’s first large subsidies was a multimillion-dollar gift to Edward subsidy) and the case against the TVA (bureaucratic inefficiencies plus Collins in the 1840s to build and operate four steamships to and from the drain of taxpayer dollars) became standard arguments used to England to deliver passengers, freight, and mail. With the cushion of support or oppose other federal subsidies—both during and after the federal aid, Collins had no incentive to innovate with steel hulls or New Deal years. engine technology. Like the farmers of the Tennessee Valley, he could make do with federal help so why try something different? Within ten Then came William U. Chandler with a devastating book, The Myth years Collins had lost the competitive race to Cornelius Vanderbilt, who of TVA, written in 1983. Chandler said the problem was more had no federal subsidy but showed great innovation in steamship complicated than that of the whole nation subsidizing a small part. He design and the economics of steamship operation. said the Tennessee Valley’s prosperity was actually being held back by the TVA. The Union Pacific received tens of millions of dollars in federal aid and millions of acres of land to build a transcontinental railroad that Chandler’s evidence was astonishing. For example, Georgia, which was not as straight, not as well built, and not as stable as the Great had nothing equivalent to the TVA, and Tennessee had nearly identical Northern Railroad, which received not a cent of federal aid. The levels of income before the TVA, but during the 1940s and 1950s builders of the Union Pacific constructed their line to receive subsidies, Georgia (and other states nearby) began pulling ahead of Tennessee. not to transport passengers in the long run. James J. Hill had to compete “Among the nine states of the southeastern United States,” Chandler with the Union Pacific, and he built the Great Northern piece by piece concluded, “there has been essentially an inverse relationship between with the best track and over the best terrain possible. During the Panic of 1893, the Union Pacific went broke, but the Great Northern made

202 A Republic—If We Can Keep It profits each year. In some ways, the federal subsidy was actually the undoing of the Union Pacific. Subsidies Change Behavior Subsidies change the way the recipients behave, and these changes 39 often work against, not for, them. That is the neglected argument against opening the door to federal aid in the first place; but it is an argument tha t needs to be studied and forcefully made. The idea that recipients of subsidies are damaged by subsidies applies to individuals as well as businesses. The example of the rise of the welfare state is pertinent here. Americans naturally have compassion for people who are poor but who are trying to improve their lives. Federal aid, however, can stifle individual initiative. That is one reason charity was a private function in the United States so long. Private givers can more easily determine the quantity and duration of aid needed to restore broken lives. During the 1960s, under the Aid to Families with Dependent Children program, money to unwed mothers increased substantially. As Chapter Thirty-Nine a result, recipients had an incentive not to get married or go to work because those activities would cause them to lose their federal A Tribute to the Jitney assistance. Thus American taxpayers were not the only losers in the program. R ecipient s who never devel oped their talents were losers as No person shall operate or cause to be operated any jitney upon any well. street, avenue, boulevard or other public place within the City of Most students of government intervention know that federal Detroit whether such jitney operates wholly within the City of Detroit, subsidies are a drain on those who pay for them. What needs more or from some point within the City of Detroit or to some point outside emphasis is that sometimes the recipients of tax dollars become worse of the City of Detroit to some point within the City of Detroit. off as well. So reads the official ban on one of the oldest illegal businesses that —BWF, October 2007 still operate openly in Detroit, Michigan. The rather emphatic language says, in effect, “We don’t want any part of this!” And yet on public bulletin boards at grocery, drug, and department stores all over the city, one can find notices that announce, “For Jitney Service, Call This Number.” Just what is this “jitney” thing that the City of Detroit, in the name of protecting the public, officially declares verboten? It’s a very popular business in which mostly retired autoworkers, church deacons, widowers, and otherwise idle but able citizens charge a small fee to give poor people a ride from where they shop to where they live. The crime is that jitneys do their good work without a taxi license from the city government—the same city government that wouldn’t 203 204 A Republic—If We Can Keep It A Tribute to the Jitney 205 authorize a single additional taxicab for 50 years. Getting a license to do Jitneys aren’t special to Detroit. They operate in most major just about anything in Detroit means endless delays, lengthy waiting American cities in direct but illegal competition with both the lists, mounds of paperwork, and senseless rigmarole. government-sanctioned taxi monopolies and government-run bus systems. In some places, they face a lot more harassment from the authorities than they do in Detroit. Thriving Business In New York City, the police bust jitney drivers all the time. Writing Fortunately, the cops in Detroit look the other way and the jitney in the New York Times Magazine of August 10, 1997, John Tierney tells business is thriving. According to the Detroit Free Press, no one has filed the story of an immigrant from Barbados who spent years trying to go a complaint against a jitney in at least 26 years and no jitney driver in the legal route and get a license to transport residents around the city in recent memory has had to face the stipulated fine of $500 and 90 days his van. His application included more than 900 supporting statements in jail. Nearly a third of Detroit’s households don’t have cars, and the from riders, business groups, and church leaders. He was approved by city has one of the lowest per capita incomes of any urban area in the the City Taxi and Limousine Commission and supported by Mayor Rudy nation, so it’s likely that thousands of technically illegal jitney rides Giuliani. But in the end, the city council did what it has done with almost occur there every week. The drivers charge much less than the taxicabs every such request: it rejected his application. Now this outlaw (which many of their customers cannot afford), often carry their clients’ entrepreneur and thousands just like him in the Big Apple dodge the bags from the store to the vehicle, are easily accessible in any cops every day as they earn a living and their customers’ approval. neighborhood, and are the primary means of transportation for Detroit’s poor. Jitneys have a long and honorable tradition in America. According to two California economic historians writing in the October 1972 Journal The spontaneous order that Detroit’s jitney system has produced is of Law and Economics, the first one appeared in 1914 in Los Angeles, elaborate as well as efficient. According to a repor t from the when L. P. Draper accepted a fare from a stranger in exchange for a brief Washington, D.C.-based Institute for Justice: ride in Draper’s Ford Model T. The fare was a “jitney”—slang for a Although the jitney drivers in Detroit do not at first seem to be nickel—and it became the industry’s standard fee for many years organized, the structure of jitney service is actually quite complex. thereafter. By the autumn of 1915, a thriving jitney industry was While there is little camaraderie and no formal organization of providing inexpensive and reliable transportation in cities from San jitney drivers, the market produces a structure of needs and Francisco to Portland, Maine. services. . . . [They] operate mostly out of strip mall shopping It didn’t take long, however, for public officials and their friends in centers. . . . Most jitney drivers will not service the whole shopping the electric streetcar industry to start piling on regulations with the aim center but will attach themselves to one store. Thus, each driver has of running the jitney competition out of business. The Electric Railway his territory. Well-known jitney drivers often will transport the Journal called the jitneys “a menace,” “a malignant growth,” and “this store’s employees to and from work as well. Frankenstein of transportation.” Assurance of driver reliability is handled nicely by the market itself. During World War I, the American Electric Railway Association even Word of mouth directs store employees and customers to particular suggested that jitney drivers be drafted into the military. It called for drivers, who tend to live in the areas they serve. Owners of stores vouch the War Industries Board to “suppress entirely all useless competition for certain drivers by issuing them cards that are placed prominently in with existing electric railways” and argued that “men engaged in windshields. Drivers seem to prefer this private certification of nonessential automobile service of this nature should be forced to competence to licensing. “When asked about the possibility of jitney obtain some useful occupations or compelled to enter the service.” licenses,” says the Institute for Justice, “many drivers are suspicious of what it would mean to have to deal with the bureaucracy at the Electric railways aren’t around much anymore, but taxicab and city City/County Building.” bus monopolies have taken their place in the war against jitneys. Laws against jitneys and the victimless crime of helping people get around

206 A Republic—If We Can Keep It town without a license, whether fully enforced or not, represent a cynical use of the police power of government by special interests. They are evidence of corrupt and stupid politicians who often express sympathy for the poor at the same time they make w ar on poor entrepreneurs. 40 The persistence of jitneys on America’s streets is an inspiration, a testimony to the power of the profit motive that fires up people to help people even when it’s illegal to do so. As to the war against them, Mr. Bumble’s famous line from Dickens’s Oliver Twist comes to mind: “The law is a ass.” —LWR, January 2000

Chapter Forty

In the Grip of Madness

“Thank God we had the federal government last week to bail out the private sector!” That is what a rather statist friend of mine declared a year ago as the economy tanked, almost gleeful that the financial crisis seemed to be proving how much we all need a massive federal establishment to both regulate and rescue us. Never mind the federal government’s own indispensable role as an enabler in the crisis, from its reckless monetary policy to its jawboning banks into making dubious mortgage loans. Never mind the long-term danger of its assumption of colossal new obligations and the moral hazard in the message its intervention sends. My response to my friend was of a more narrow focus. “Thank God we have the private sector to bail out the federal government not just last week, but every week!” I exclaimed. Think about it. Taxes on the private sector pay a majority of the federal government’s bills. For most of the rest, the government borrows by selling its debt obligations, mostly to private-sector entities–including banks, insurance companies, and individuals.

207 208 A Republic—If We Can Keep It In the Grip of Madness 209

The federal government is the world’s biggest taxer and the world’s Once upon a time in America, most citizens expected government to biggest debtor. If those of us in the private sector didn’t pay our taxes or keep the peace and otherwise leave them alone. We built a vibrant, self- didn’t buy Washington’s paper, the feds would have gone belly-up reliant, entrepreneurial culture with strong families and solid values. decades ago. We’ve rescued Washington to the tune of tens of trillions We respected property and largely kept the spirit of the Eighth and of dollars over the years. A big difference between Washington’s bailing Tenth Commandments against coveting and stealing. We understood out the private sector and the private sector’s bailing out Washington is that government didn’t have anything to give anybody except what it that the private sector has to work, invest, employ people, and produce first took from somebody and that a government big enough to give us goods to come up with the cash. It can’t create it out of t hin air like Ben everything we want would be big enough to take away everything we’ve Bernanke can. got. We practiced fiscal discipline in our personal lives and expected Our friends in Washington have blessed us with future burdens nothing less from the people in the government we elected, or we threw almost too astronomical to comprehend. In the name of taking care of them out. us in our old age, we are saddled with no less than $6 trillion in Social But somewhere along the way we lost our moral compass. And just Security payouts over the next 75 years–for which there are no like the Roman Republic that rose on integrity and collapsed in presently earmarked funding streams. According to Brian Riedl of the turpitude, we thought the “bread and circuses” the government could Heritage Foundation, the unfunded obligations for the new federal provide us would buy us comfort and security. prescription drug program, enacted under President Bush, total another We gave the government the responsibility to educate our children, $8 trillion. though government can never be counted on to teach well the main On and on it goes. The private sector has an awful lot of bailing out ingredients of a free society—liberty and character—or just about any- to do in the coming decades. I shudder to think how deeply we thing else, for that matter. We asked the government to give us health taxpayers will have to dig in the not-too-distant future to pay the bills of care, wel-fare, pensions, college education, and farm subsidies, and now our benevolent, compassionate, and forward-thinking government. our politicians are bankrupting the country to pay the bills. This welfare Since Barack Obama took office in January 2009, the federal state of ours has become one big circle of 305 million people, each with government has spent a full billion dollars every single hour. Before his his hand in the next fellow’s pocket. term is half over, federal spending will have doubled in just a decade. This is a government whose reach even before the financial crisis The deficit in one year’s budget is now as large as the entire budget in scarcely left an aspect of American life untouched, from the cradle to the George W. Bush’s first year as president, 2001–and I thought not very grave and the volume of our toilet-bowl water in between. As a portion long ago that the spending spree he and the Republicans gave us would of our personal income, its tax and regulatory burden consumes at least be tough to beat! The flood of red ink is now adding to the national debt five times what it did just a century ago. But to the majority on the to the tune of about $4 billion every day. At well over $11 trillion, that Potomac, government is nowhere yet big enough. This is madness writ debt amounts to $37,000 for every living American. large.

Too Big to Succeed? Stick to the Kn itting We’re told by the wise planners in Washington that certain private Remember In Search of Excellence, the 1982 best-selling manage- firms are “too big to fa il.” So we’re h a nding big chunks o f them over to ment book by Tom Peters and Robert Waterman? One of its salient the gove r nment. points is that an organization gets off track when it no longer “sticks to The question we all should be asking ourselves is this: Are we the knitting.” When it allows its mission to blur and stretch far beyond trusting our economy and our lives to a government that is too big to its founding design, when it becomes distracted by endless and dubious succeed? new responsibilities, its core competency evaporates. It will fail to do

210 A Republic—If We Can Keep It what it is supposed to do, because it’s doing too much of what it’s not supposed to do. It may come as a surprise to those who see aspirin made in Washington as the cure for every ailment, but the federal government is Part VI not God. It can’t even be a good Santa Claus. It’s no Mother Teresa either, because on those occasions when it does some good it usually costs an arm and a leg and sends a big part of the bill to generations yet unborn. The fact is, the bigger government gets, the more it starts to look like Moe, Larry, and Curly. Accentuating the madness of the present day, the cover of Newsweek declared last March, “We are all socialists now.” Pardon me, Depressions, Poverty and but I’m not about to sign on to a proven flop. —LWR, September 2009 Inequality

Chapter Forty-One

Great Myths of the Great Depression

Many volumes have been written about the Great Depression of 1929–1941 and its impact on the lives of millions of Americans. Historians, economists and politicians have all combed the wreckage searching for the “black box” that will reveal the cause of the calamity. Sadly, all too many of them decide to abandon their search, finding it easier perhaps to circulate a host of false and harmful conclusions about the events of seven decades ago. Consequently, many people today continue to accept critiques of free-market capitalism that are unjustified and support government policies that are economically destructive. How bad was the Great Depression? Over the four years from 1929 to 1933, production at the nation’s factories, mines and utilities fell by more than half. People’s real disposable incomes dropped 28 percent. Stock prices collapsed to one-tenth of their pre-crash height. The number of unemployed Americans rose from 1.6 million in 1929 to 12.8 million in 1933. One of every four workers was out of a job at the Depression’s nadir, and ugly rumors of revolt simmered for the first time since the Civil War.

213 214 A Republic—If We Can Keep It Great Myths of the Great Depression 215

The terror of the Great Crash has been the failure to explain it,” II. The Disintegration of the World Economy writes economist Alan Reynolds. “People were left with the feeling that III. The New Deal massive economic contractions could occur at any moment, without warning, without cause. That fear has been exploited ever since as the IV. The Wagner Act major justification for virtually unlimited federal intervention in The first phase covers why the crash of 1929 happened in the first economic affairs.31 place; the other three show how government intervention worsened it Old myths never die; they just keep showing up in economics and and kept the economy in a stupor for over a decade. Let’s consider each political science textbooks. With only an occasional exception, it is there one i n turn. you will find what may be the 20th century’s greatest myth: Capitalism and the free-market economy were responsible for the Great Depression, and Phase I: The Business Cycle only government intervention brought about America’s economic recovery. The Great Depression was not the country’s first depression, though A Modern Fairy Tale it proved to be the longest. Several others preceded it. According to this simplistic perspective, an important pillar of A common thread woven through all of those earlier debacles was capitalism, the stock market, crashed and dragged America into disastrous intervention by government, often in the form of political depression. President Herbert Hoover, an advocate of “hands-off,” or mismanagement of the money and credit supply. None of these laissez-faire, economic policy, refused to use the power of government depressions, however, lasted more than four years and most of them and conditions worsened as a result. It was up to Hoover’s successor, were over in two. The calamity that began in 1929 lasted at least three Franklin Delano Roosevelt, to ride in on the white horse of government times longer than any of the country’s previous depressions because the intervention and steer the nation toward recovery. The apparent lesson government compounded its initial errors with a series of additional to be drawn is that capitalism cannot be trusted; government needs to and harmful interventions. take an active role in the economy to save us from inevitable decline. Central Planners Fail at Monetary Policy But those who propagate this version of history might just as well A popular explanation for the stock market collapse of 1929 top off their remarks by saying, “And Goldilocks found her way out of concerns the practice of borrowing money to buy stock. Many history the forest, Dorothy made it from Oz back to Kansas, and Little Red texts blithely assert that a frenzied speculation in shares was fed by Riding Hood won the New York State Lottery.” The popular account of excessive “margin lending.” But Marquette University economist Gene the Depression as outlined above belongs in a book of fairy tales and not Smiley, in his 2002 book Rethinking the Great Depression, explains why in a serious discussion of economic history. this is not a fruitful observation: There was already a long history of margin lending on stock The Great, Great, Great, Great Depression exchanges, and margin requirements—the share of the purchase price paid in cash—were no lower in the late twenties than in the To properly understand the events of the time, it is factually early twenties or in previous decades. In fact, in the fall of 1928 appropriate to view the Great Depression as not one, but four margin requirements began to rise, and borrowers were required to consecutive downturns rolled into one. These four “phases” are:32 pay a larger share of the purchase price of the stocks. I. Monetary Policy and the Business Cycle The margin lending argument doesn’t hold much water. Mischief with the money and credit supply, however, is another story. 31 Alan Reynolds, “What Do We Know About the Great Crash?” National Review, Most monetary economists, particularly those of the “Austrian November 9, 1979, p. 1416. School,” have observed the close relationship between money supply 32 Hans F. Sennholz, “The Great Depression,” The Freeman, April 1975, p. 205.

216 A Republic—If We Can Keep It Great Myths of the Great Depression 217 and economic activity. When government inflates the money and credit of one view about what happened next: The central bank presided over supply, interest rates at first fall. Businesses invest this “easy money” in a dramatic contraction of the money supply that began late in the new production projects and a boom takes place in capital goods. As the decade. The federal government’s responses to the resulting recession boom matures, business costs rise, interest rates readjust upward, and took a bad situation and made it far, far worse. profits are squeezed. The easy-money effects thus wear off and the The Bottom Drops Out monetary authorities, fearing price inflation, slow the growth of, or even contract, the money supply. In either case, the manipulation is enough By 1928, the Federal Reserve was raising interest rates and choking to knock out the shaky supports from u nderneath the economic house off the money supply. For example, its discount rate (the rate the Fed of cards. charges member banks for loans) was increased four times, from 3.5 percent to 6 percent, between January 1928 and August 1929. The One prominent interpretation of the Federal Reserve System’s central bank took further deflationary action by aggressively selling actions prior to 1929 can be found in America’s Great Depression by government securities for months after the stock market crashed. For economist Murray Rothbard. Using a broad measure that includes the next three years, the money supply shrank by 30 percent. As prices currency, demand and time deposits, and other ingredients, he then tumbled throughout the economy, the Fed’s higher interest rate estimated that the Fed bloated the money supply by more than 60 policy boosted real (inflation-adjusted) rates dramatically. percent from mid-1921 to mid-1929.33 Rothbard argued that this expansion of money and credit drove interest rates down, pushed the The most comprehensive chronicle of the monetary policies of the stock market to dizzy heights, and gave birth to the “Roaring Twenties.” period can be found in the classic work of Nobel Laureate Milton Friedman and his colleague Anna Schwartz, A Monetary History of the Reckless money and credit growth constituted what economist United States, 1867–1960. Friedman and Schwartz argue conclusively 34 Benjamin M. Anderson called “the beginning of the New Deal” —the that the contraction of the nation’s money supply by one-third between name for the better-known but highly interventionist policies that August 1929 and March 1933 was an enormous drag on the economy would come later under President Franklin Roosevelt. However, other and largely the result of seismic incompetence by the Fed. The death in scholars raise doubts that Fed action was as inflationary as Rothbard October 1928 of Benjamin Strong, a powerful figure who had exerted believed, pointing to relatively flat commodity and consumer prices in great influence as head of the Fed’s New York district bank, left the Fed the 1920s as evidence that monetary policy was not so wildly flound e ring without capable leadership—making bad policy even irresponsible. worse.35 Substantial cuts in high marginal income tax rates in the Coolidge At first, only the “smart” money—the Bernard Baruchs and the years certainly helped the economy and may have ameliorated the price Joseph Kennedys who watched things like money supply and other effect of Fed policy. Tax reductions spurred investment and real government policies—saw that the party was coming to an end. Baruch economic growth, which in turn yielded a burst of technological actually began selling stocks and buying bonds and gold as early as advancement and entrepreneurial discoveries of cheaper ways to 1928; Kennedy did likewise, commenting, “only a fool holds out for the produce goods. This explosion in productivity undoubtedly helped to top dollar.”36 keep prices lower than they would have otherwise been. The masses of investors eventually sensed the change at the Fed Regarding Fed policy, free-market economists who differ on the and then the stampede began. In a special issue commemorating the extent of the Fed’s monetary expansion of the early and mid-1920s are

33 Murray Rothbard, America’s Great Depression (Kansas City: Sheed and Ward, Inc., 1975), p. 89. 35 Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United 34 Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic States, 1867–1960 (New York: National Bureau of Economic Research, 1963; ninth History of the United States, 1914-46, 2nd edition (Indianapolis: Liberty Press, 1979), p. paperback printing by Princeton University Press, 1993), pp. 411-415. 127. 36 Lindley H. Clark, Jr., “After the Fall,” The Wall Street Journal, October 26, 1979, p. 18.

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50th anniversary of the stock market collapse, U.S. News & World Report described it this way: Buddy, Can You Spare $20 Million? Actually the Great Crash was by no means a one-day affair, despite Black Thursday shook Michigan harder than almost any other state. frequent references to Black Thursday, October 24, and the Stocks of auto and mining companies were hammered. Auto production following week’s Black Tuesday. As early as September 5, stocks in 1929 reached an all-time high of slightly more than 5 million vehicles, were weak in heavy trading, after having moved into new high then quickly slumped by 2 million in 1930. By 1932, near the deepest ground two days earlier. Declines in early October were called a point of the Depression, they had fallen by another 2 million to just “desirable correction.” The Wall Street Journal, predicting an 1,331,860—down an astonishing 75 percent from the 1929 peak. autumn rally, noted that “some stocks rise, some fall.” Thousands of investors everywhere, including many well-known Then, on October 3, stocks suffered their worst pummeling of the people, were hit hard in the 1929 crash. Among them was Winston year. Margin calls went out; some traders grew apprehensive. But Churchill. He had invested heavily in American stocks before the crash. the next day, prices rose again and thereafter seesawed for a Afterward, only his writing skills and positions in government restored fortnight. his finances. The real crunch began on Wednesday, October 23, with what one Clarence Birdseye, an early developer of packaged frozen foods, had observer called “a Niagara of liquidation.” Six million shares sold his bus i ness for $30 million and put all his money into stocks. He changed hands. The industrial average fell 21 points. “Tomorrow, was wiped out. the t urn will come,” brokers told one another. Prices, they said, had been carried to “unreasonably low” levels. William C. Durant, founder of General Motors, lost more than $40 million in the stock market and wound up a virtual pauper. (GM itself But the next day, Black Thursday, stocks were dumped in even stayed in the black throughout the Depression under the cost-cutting heavier selling. The ticker fell behind more than 5 hours, and finally leadership of Alfred P. Sloan.) stopped grinding out quotations at 7:08 p.m.37

At their peak, stocks in the Dow Jones Industrial Average were selling for 19 times their earnings—somewhat high, but hardly what Phase II: Disintegration of the World Economy stock market analysts regard as a sign of inordinate speculation. The Though modern myth claims that the free market “self-destructed” distortions in the economy promoted by the Fed’s monetary policy had in 1929, government policy was the debacle’s principal culprit. If this set the country up for a recession, but other impositions to come would crash had been like previous ones, the hard times would have ended in soon turn the recession into a full-scale disaster. As stocks took a two or three years at the most, and likely sooner than that. But beating, Congress was playing with fire: On the very morning of Black unprecedented political bungling instead prolonged the misery for over Thursda y , the nation’s newspapers r epor t ed that the political forces for 10 years. higher trade-damaging tariffs were making gains on Capitol Hill. Unemployment in 1930 averaged a mildly recessionary 8.9 percent, The stock market crash was only a reflection—not the direct up from 3.2 percent in 1929. It shot up rapidly until peaking out at more cause—of the destructive government policies that would ultimately than 25 percent in 1933. Until March of 1933, these were the years of produce the Great Depression: The market rose and fell in almost direct President Herbert Hoover—a man often depicted as a champion of synchronization with what the Fed and Congress were doing. And what noninterventionist, laissez-faire economics. they did in the 1930s ranks way up there in the annals of history’s greatest follies. “The Greatest Spend ing Administration In All Of History” Did Hoover really subscribe to a “hands-off-the-economy,” free- 37 “Tearful Memories That Just Won’t Fade Away,” U. S. News & World Report, October market philosophy? His opponent in the 1932 election, Franklin 29, 1979, pp. 36-37.

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Roosevelt, didn’t think so. During the campaign, Roosevelt blasted Tariffs on linseed oil, tungsten, and casein hammered the U.S. paint, Hoover for spending and taxing too much, boosting the national debt, steel and paper industries, respectively. More than 800 items used in choking off trade, and putting millions on the dole. He accused the automobile production were taxed by Smoot-Hawley. Most of the president of “reckless and extravagant” spending, of thinking “that we 60,000 people employed in U.S. plants making cheap clothing out of ought to center control of everything in Washington as rapidly as imported wool rags went home jobless after the tariff on wool rags rose possible,” and of presiding over “the greatest spending administration by 140 percent.40 in peacetime in all of history.” Roosevelt’s running mate, John Nance Officials in the administration and in Congress believed that raising Garner, charged that Hoover was “leading the country down the path of trade barriers would force Americans to buy more goods made at home, 38 socialism.” Contrary to the conventional view about Hoover, which would solve the nagging unemployment problem. But they Roosevelt and Garner were absolutely right. ignored an important principle of international commerce: Trade is The crowning folly of the Hoover administration was the Smoot- ultimately a two-way street; if foreigners cannot sell their goods here, Hawley Tariff, passed in June 1930. It came on top of the Fordney- then they cannot earn the dollars they need to buy here. Or, to put it McCumber Tariff of 1922, which had already put American agriculture another way, government cannot shut off imports without in a tailspin during the preceding decade. The most protectionist simultaneously shutting off exports. legislation in U.S. history, Smoot-Hawley virtually closed the borders to You Tax Me, I Tax You foreign goods and ignited a vicious international trade war. Professor Barry Poulson describe s the scope of the act: Foreign companies and their workers were flattened by Smoot- Hawley’s steep tariff rates and foreign governments soon retaliated The act raised the rates on the entire range of dutiable with trade barriers of their own. With their ability to sell in the commodities; for example, the average rate increased from 20 American market severely hampered, they curtailed their purchases of percent to 34 percent on agricultural products; from 36 percent to American goods. American agriculture was particularly hard hit. With a 47 percent on wines, spirits, and beverages; from 50 to 60 percent stroke of the presidential pen, farmers in this country lost nearly a third on wool and woolen manufactures. In all, 887 tariffs were sharply of their markets. Farm prices plummeted and tens of thousands of increased and the act broadened the list of dutiable commodities to farmers went bankrupt. A bushel of wheat that sold for $1 in 1 929 was 3,218 items. A crucial part of the Smoot-Hawley Tariff was that selling for a mere 30 cents by 1932. many tariffs were for a specific amount of money rather than a percentage of the price. As prices fell by half or more during the With the collapse of agriculture, rural banks failed in record Great Depression, the effective rate of these specific tariffs doubled, numbers, dragging down hundreds of thousands of their customers. increasing the protection afforded under the act.39 Nine thousand banks closed their doors in the United States between 1930 and 1933. The stock market, which had regained much of the Smoot-Hawley was as broad as it was deep, affecting a multitude of ground it had lost since the previous October, tumbled 20 points on the products. Before its passage, clocks had faced a tariff of 45 percent; the day Hoover signed Smoot-Hawley into law, and fell almost without act raised that to 55 percent, plus as much as another $4.50 per clock. respite for the next two years. (The market’s high, as measured by the Tariffs on corn and butter were roughly doubled. Even sauerkraut was Dow Jones Industrial Average, was set on Sept. 3, 1929, at 381. It hit its tariffed for the first time. Among the few remaining tariff-free goods, 1929 low of 198 on Nov. 13, then rebounded to 294 by April 1930. It strangely enough, were leeches and skeletons (perhaps as a political declined again as the tariff bill made its way toward Hoover’s desk in sop to the American Medical Association, as one wag wryly remarked). June and did not bottom out until it reached a mere 41 two years later. It would be a quarter-century before the Dow would climb to 381 again.) 38 “FDR’s Disputed Legacy,” Time, February 1, 1982, p. 23. 39 Barry W. Poulson, Economic History of the United States (New York: Macmillan Publishing Co., Inc., 1981), p. 508. 40 Reynolds, p. 1419.

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The shrinkage in world trade brought on by the tariff wars helped it at the time, but practically the whole New Deal was extrapolated from set the stage for World War II a few years later. In 1929, the rest of the programs that Hoover started.”43 world owed American citizens $30 billion. Germany’s Weimar Republic Though Hoover at first did lower taxes for the poorest of Americans, was struggling to pay the enormous reparations bill imposed by the dis- Larry Schweikart and Michael Allen in their sweeping A Patriot’s History astrous Treaty of Versailles. When tariffs made it nearly impossible for of the United States: From Columbus’s Great Discovery to the War on foreign businessmen to sell their goods in American markets, the Terror stress that he “offered no incentives to the wealthy to invest in burden of their debts became massively heavier and emboldened new plants to stimulate hiring.” He even taxed bank checks, “which demagogues like Adolf Hitler. “When goods don’t cross frontiers, armies accelerated the decline in the availability of money by penalizing people will,” warns an old but painfully true maxim. for writing checks.”44 Free Markets or Free Lunches? In September 1931, with the money supply tumbling and the econ- Smoot-Hawley by itself should lay to rest the myth that Hoover was omy reeling from the impact of Smoot-Hawley, the Fed imposed the a free market practitioner, but there is even more to the story of his biggest hike in its discount rate in history. Bank deposits fell 15 percent administration’s interventionist mistakes. Within a month of the stock within four months and sizable, deflationary declines in the nation’s market crash, he convened conferences of business leaders for the money supply persisted through the first half of 1932. purpose of jawboning them into keeping wages artificially high even Compounding the error of high tariffs, huge subsidies and de- though both profits and prices were falling. Consumer prices plunged flationary monetary policy, Congress then passed and Hoover signed almost 25 percent between 1929 and 1933 while nominal wages on the Revenue Act of 1932. The largest tax increase in peacetime history, average decreased only 15 percent—translating into a substantial it doubled the income tax. The top bracket actually more than doubled, increase in wages in real terms, a major component of the cost of doing soaring from 24 percent to 63 percent. Exemptions were lowered; the business. As economist Richard Ebeling notes, “The ‘high-wage’ policy earned income credit was abolished; corporate and estate taxes were of the Hoover administration and the trade unions . . . succeeded only in raised; n e w gift, gasoline and auto taxes w ere i mposed; and postal rates pricing workers out of the labor market, generatin g an increasing circle were sharply hiked. of unemployment.”41 Can any serious scholar observe the Hoover administration’s Hoover dramatically increased government spending for subsidy massive economic intervention and, with a straight face, pronounce the and relief schemes. In the space of one year alone, from 1930 to 1931, inevitably deleterious effects as the fault of free markets? Schweikart the federal government’s share of GNP soared from 16.4 percent to 21.5 and Allen survey some of the wreckage: percent.42 Hoover’s agricultural bureaucracy doled out hundreds of millions of dollars to wheat and cotton farmers even as the new tariffs By 1933, the numbers produced by this comedy of errors were wiped out their markets. His Reconstruction Finance Corporation ladled staggering: national unemployment rates reached 25 percent, but out billions more in business subsidies. Commenting decades later on within some individual cities, the statistics seemed beyond Hoover’s administration, Rexford Guy Tugwell, one of the architects of comprehension. Cleveland reported that 50 percent of its labor Franklin Roosevelt’s policies of the 1930s, explained, “We didn’t admit force was unemployed; Toledo, 80 percent; and some states even averaged over 40 percent. Because of the dual-edged sword of declining revenues and increasing welfare demands, the burden on the cities pushed many municipalities to the brink. Schools in New York shut down, and teachers in Chicago were owed some $20 41 Richard M. Ebeling, “Monetary Central Planning and the State-Part XI: The Great Depression and the Crisis of Government Intervention,” Freedom Daily (Fairfax, Virginia: The Future of Freedom Foundation, November 1997), p. 15. 43 Ibid., p. 741. 42 Paul Johnson, A History of the American People (New York: HarperCollins Publishers, 44 Larry Schweikart and Michael Allen, A Patriot’s History of the United States: From 1997), p. 740. Columbus’s Great Discovery to the War on Terror (New York: Sentinel, 2004), p. 553.

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million. Private schools, in many cases, failed completely. One But as Dr. Hans Sennholz of Grove City College explains, it was FDR’s government study found that by 1933 some fifteen hundred policies to come that Americans had genuine reason to fear: colleges had gone belly-up, and book sales plummeted. Chicago’s In his first 100 days, he swung hard at the profit order. Instead of library system did not purchase a single book in a year-long clearing away the prosperity barriers erected by his predecessor, he 45 period. built new ones of his own. He struck in every known way at the Phase III: The New Deal integrity of the U.S. dollar through quantitative increases and Franklin Delano Roosevelt won the 1932 presidential election in a qualitative d eterioration. He seized the people’s gold holdings and 47 landslide, collecting 472 electoral votes to just 59 for the incumbent subsequently devalued the dollar by 40 percent. Herbert Hoover. The platform of the Democratic Party, whose ticket Frustrated and angered that Roosevelt had so quickly and Roosevelt headed, declared, “We believe that a party platform is a thoroughly abandoned the platform on which he was elected, Director covenant with the people to be faithfully kept by the party entrusted of the Bureau of the Budget Lewis W. Douglas resigned after only one with power.” It called for a 25 percent reduction in federal spending, a year on the job. At H arvard University in May 1935, Douglas made it balanced federal budget, a sound gold currency “to be preserved at all plain that America was facing a momentous choice: hazards,” the removal of government from areas that belonged more Will we choose to subject ourselves—this great country—to the appropriately to private enterprise and an end to the “extravagance” of despotism of bureaucracy, controlling our every act, destroying Hoover’s farm programs. This is what candidate Roosevelt promised, what equality we have attained, reducing us eventually to the but it bears no resemblance to what President Roosevelt actually condition of impoverished slaves of the state? Or will we cling to the delivered. liberties for which man has struggled for more than a thousand Washington was rife with both fear and optimism as Roosevelt was years? It is important to understand the magnitude of the issue sworn in on March 4, 1933—fear that the economy might not recover before us. . . . If we do not elect to have a tyrannical, oppressive and optimism that the new and assertive president just might make a bureaucracy controlling our lives, destroying progress, depressing difference. Humorist Will Rogers captured the popular feeling toward the standard of living . . . then should it not be the function of the FDR as he assembled the new administration: “The whole country is Federal government under a democracy to limit its activities to with him, just so he does something. If he burned down the Capitol, we those which a democracy may adequately deal, such for example as would all cheer and say, well, we at least got a fire started anyhow.”46 national defense, main-taining law and order, protecting life and “Nothing To Fear But Fear Itself” property, preventing dis-honesty, and . . . guarding the public against . . . vested special interests?48 Roosevelt did indeed make a difference, though probably not the sort of difference for which the country had hoped. He started off on the New Dealing from the Bottom of the Deck wrong foot when, in his inaugural address, he blamed the Depression on Crisis gripped the banking system when the new president assumed “unscrupulous money changers.” He said nothing about the role of the office on March 4, 1933. Roosevelt’s action to close the banks and Fed’s mismanagement and little about the follies of Congress that had declare a nationwide “banking holiday” on March 6 (which did not contributed to the problem. As a result of his efforts, the economy completely end until nine days later) is still hailed as a decisive and would linger in depression for the rest of the decade. Adapting a phrase necessary action by Roosevelt apologists. Friedman and Schwartz, from 19th century writer Henry David Thoreau, Roosevelt famously however, make it plain that this supposed cure was “worse than the declared in his address that, “We have nothing to fear but fear itself.”

47 Sennholz, p. 210. 48 From The Liberal Tradition: A Free People and a Free Economy by Lewis W. Douglas, as 45 Ibid., p. 554. quoted in “Monetary Central Planning and the State, Part XIV: The New Deal and Its 46 “FDR’s Disputed Legacy,” p. 24. Critics,” by Richard M. Ebeling in Freedom Daily, February 1998, p. 12.

226 A Republic—If We Can Keep It Great Myths of the Great Depression 227 disease.” The Smoot-Hawley tariff and the Fed’s unconscionable Glass put it well when he warned Roosevelt in early 1933: “It’s monetary mischief were primary culprits in producing the conditions dishonor, sir. This great government, strong in gold, is breaking its that gave Roosevelt his excuse to temporarily deprive depositors of promises to pay gold to widows and orphans to whom it has sold their money, and the bank holiday did nothing to alter those government bonds with a pledge to pay gold coin of the present fundamentals. “More than 5,000 banks still in operation when the standard of value. It is breaking its promise to redeem its paper money holiday was declared did not reopen their doors when it ended, and of in gold coin of the present standard of value. It’s dishonor, sir.”52 these, over 2,000 never did thereafter,” report Friedman and Schwartz. Though he seized the country’s gold, Roosevelt did return booze to 49 America’s bars and parlor rooms. On his second Sunday in the White Economist Jim Powell of the Cato Institute authored a splendid book House, he remarked at dinner, “I think this would be a good time for on the Great Depression in 2003, titled FDR’s Folly: How Roosevelt and beer.”53 That same night, he drafted a message asking Congress to end His New Deal Prolonged the Great Depression. He points out that “Almost Prohibition. The House approved a repeal measure on Tuesday, the all the failed banks were in states with unit banking laws”—laws that Senate passed it on Thursday and before the year was out, enough prohibited banks from opening branches and thereby diversifying their states had ratified it so that the 21st Amendment became part of the portfolios and reducing their risks. Powell writes: “Although the United Constitution. One observer, commenting on this remarkable turn of States, with its unit banking laws, had thousands of bank failures, Canada, events, noted that of two men walking down the street at the start of which permitted branch banking, didn’t have a single failure . . .”50 1933—one with a gold coin in his pocket and the other with a bottle of Strangely, critics of capitalism who love to blame the market for the whiskey in his coat—the man with the coin would be an upstanding Depression never mention that fact. citizen and the man with the whiskey would be the outlaw. A year later, Congress gave the president the power first to seize the private gold precisely the reverse was true. holdings of American citizens and then to fix the price of gold. One In the first year of the New Deal, Roosevelt proposed spending $10 morning, as Roosevelt ate eggs in bed, he and Secretary of the Treasury billion while revenues were only $3 billion. Between 1933 and 1936, Henry Morgenthau decided to change the ratio between gold and paper governm e nt expenditures rose b y more t han 83 percent. Federal debt dollars. After weighing his options, Roosevelt settled on a 21 cent price skyrocketed by 73 percent. hike because “it’s a lucky number.” In his diary, Morgenthau wrote, “If FDR talked Congress into creating Social Security in 1935 and anybody ever knew how we really set the gold price through a imposing the nation’s first comprehensive minimum wage law in 1938. combination of lucky numbers, I think they would be frightened.”51 While to this day he gets a great deal of credit for these two measures Roosevelt also single-handedly torpedoed the London Economic from the general public, many economists have a different perspective. Conference in 1933, which was convened at the request of other major The minimum wage law prices many of the inexperienced, the young, nations to bring down tariff rates and restore the gold standard. the unskilled and the disadvantaged out of the labor market. (For Washington and its reckless central bank had already made example, the minimum wage provisions passed as part of another act in mincemeat of the gold standard by the early 1930s. Roosevelt’s 1933 threw an estimated 500,000 blacks out of work). 54 And current rejection of it removed most of the remaining impediments to limitless studies and estimates reveal that Social Security has become such a currency and credit expansion, for which the nation would pay a high long-term actuarial nightmare that it will either have to be privatized or price in later years in the form of a depreciating currency. Sen. Carter the already high taxes needed to keep it afloat will have to be raised to the stratosphere.

49 Friedman and Schwartz, p. 330. 50 Jim Powell, FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression (New York: Crown Forum, 2003), p. 32. 52 Anderson, p. 315. 51 John Morton Blum, From the Morgenthau Diaries: Years of Crisis, 1928–1938 (Boston: 53 “FDR’s Disputed Legacy,” p. 24. Houghton Mifflin Company, 1959), p. 70. 54 Anderson, p. 336.

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Roosevelt secured passage of the Agricultural Adjustment Act, admirer of Italian dictator Benito Mussolini. Thundered Johnson, “May which levied a new tax on agricultural processors and used the revenue Almighty God have mercy on anyone who attempts to interfere with the to supervise the wholesale destruction of valuable crops and cattle. Blue Eagle” (the official symbol of the NRA, which one senator Federal agents oversaw the ugly spectacle of perfectly good fields of derisively referred to as the “Soviet duck”). Those who refused to cotton, wheat and corn being plowed under (the mules had to be comply with the NRA Johnson personally threatened with public convinced to trample the crops; they had been trained, of course, to boycotts and “a punch in the nose.” walk between the rows). Healthy cattle, sheep and pigs were There were ultimately more than 500 NRA codes, “ranging from the slaughtered and buried in mass graves. Secretary of Agriculture Henry production of lightning rods to the manufacture of corsets and Wallace personally gave the order to slaughter 6 million baby pigs brassieres, covering more than 2 million employers and 22 million before they grew to full size. The administration also paid farmers for workers.” 56 There were codes for the production of hair tonic, dog the first time for not working at all. Even if the AAA had helped farmers leashes, and even musical comedies. A New Jersey tailor named Jack by curtailing supplies and raising prices, it could have done so only by Magid was arrested and sent to jail for the “crime” of pressing a suit of hurting millions of others who had to pay those prices or make do with clothes for 35 cents rather than the NRA-inspired “Tailor’s Code” of 40 less to eat. cents. Blue Eagles, Red Ducks In The Roosevelt Myth, historian John T. Flynn described how the Perhaps the most radical aspect of the New Deal was the National NRA’s partisans sometimes conducted “business”: Industrial Recovery Act, passed in June 1933, which created a massive The NRA was discovering it could not enforce its rules. Black new bureaucracy called the National Recovery Administration. Under markets grew up. Only the most violent police methods could the NRA, most manufacturing industries were suddenly forced into procure enforcement. In Sidney Hillman’s garment industry the government-mandated cartels. Codes that regulated prices and terms of code authority employed enforcement police. They roamed through sale briefly transformed much of the American economy into a fascist- the garment district like storm troopers. They could enter a man’s style arrangement, while the NRA was financed by new taxes on the factory, send him out, line up his employees, subject them to minute very industries it controlled. Some economists have estimated that the interrogation, take over his books on the instant. Night work was NRA boosted the cost of doing business by an average of 40 percent— forbidden. Flying squadrons of these private coat-and-suit police not something a depressed economy needed for recovery. went through the district at night, battering down doors with axes The economic impact of the NRA was immediate and powerful. In looking for men who were committing the crime of sewing together the five months leading up to the act’s passage, signs of recovery were a pair of pants at night. But without these harsh methods many code evident: factory employment and payrolls had increased by 23 and 35 authorities said there could be no compliance because the public percent, respectively. Then came the NRA, shortening hours of work, was not back of it. 57 raising wages arbitrarily and imposing other new costs on enterprise. In The Alphabet Commissars the six months after the law took effect, industrial production dropped 25 percent. Benjamin M. Anderson writes, “NRA was not a revival Roosevelt next signed into law steep income tax increases on the measure. It was an antirevival measure. . . . Through the whole of the higher brackets and introduced a 5 percent withholding tax on NRA period industrial production did not rise as high as it had been in corporate dividends. He secured another tax increase in 1934. In fact, July 1933, before NRA came in.” 55 tax hikes became a favorite policy of Roosevelt for the next 10 years, culminating in a top income tax rate of 90 percent. Sen. Arthur The man Roosevelt picked to direct the NRA effort was General Hugh “Iron Pants” Johnson, a profane, red-faced bully and professed 56 “FDR’s Disputed Legacy,” p. 30. 57 John T. Flynn, The Roosevelt Myth (Garden City, N.Y.: Garden City Publishing Co., Inc., 55 Ibid., pp. 332-334. 1949), p. 45.

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Vandenberg of Michigan, who opposed much of the New Deal, 77,000 bridges and 116,000 buildings to which its advocates loved to lambasted Roosevelt’s massive tax increases. A sound economy would point as evidence of its efficacy.61 not be restored, he said, by following the socialist notion that America With good reason, critics often referred to the WPA as “We Piddle could “lift the lower one-third up” by pulling “the upper two-thirds Around.” In Kentucky, WPA workers catalogued 350 different ways to 58 down.” Vandenberg also condemned “the congressional surrender to cook spinach. The agency employed 6,000 “actors” though the nation’s alphabet commissars who deeply believe the American people need to actors’ union claimed only 4,500 members. Hundreds of WPA workers 59 be regimented by powerful overlords in order to be saved.” were used to collect campaign contributions for Democratic Party Alphabet commissars spent the public’s money like it was so much candidates. In Tennessee, WPA workers were fired if they refused to bilge. They were what influential journalist and social critic Albert Jay donate 2 percent of their wages to the incumbent governor. By 1941, Nock had in mi n d when he described the New Deal as “a nation-wide, only 59 percent of the WPA budget went to paying workers anything at State-managed mobilization of inane buffoonery and aimless commotion.”60 all; the rest was sucked up in administration and overhead. The editors Roosevelt’s Civil Works Administration hired actors to give free of The New Republic asked, “Has [Roosevelt] the moral stature to admit shows and librarians to catalog archives. It even paid researchers to now that the WPA was a hasty and grandiose political gesture, that it is 62 study the history of the safety pin, hired 100 Washington workers to a wretched failure and s hould be abolished?” The la st o f the WPA’s patrol the streets with balloons to frighten starlings away from public projects was not eliminated until July of 1943. buildings, and put men on the public payroll to chase tumbleweeds on Roosevelt has been lauded for his “job-creating” acts such as the windy days. CWA and the WPA. Many people think that they helped relieve the The CWA, when it was started in the fall of 1933, was supposed to Depression. What they fail to realize is that it was the rest of Roosevelt’s be a short-lived jobs program. Roosevelt assured Congress in his State tinkering that prolonged the Depression and which largely prevented of the Union message that any new such program would be abolished the jobless from finding real jobs in the first place. The stupefying roster within a year. “The federal government,” said the president, “must and of wasteful spending generated by these jobs programs represented a shall quit this business of relief. I am not willing that the vitality of our diversion of valuable resources to politically motivated and econom- people be further stopped by the giving of cash, of market baskets, of a ically counterproductive purposes. few bits of weekly work cutting grass, raking leaves, or picking up A brief analogy will illustrate this point. If a thief goes house to papers in the public parks.” Harry Hopkins was put in charge of the house robbing everybody in the neighborhood, then heads off to a agency and later said, “I’ve got four million at work but for God’s sake, nearby shopping mall to spend his ill-gotten loot, it is not assumed that don’t ask me what they are doing.” The CWA came to an end within a because his spending “stimulated” the stores at the mall he has thereby few months but was replaced with another temporary relief program performed a national service or provided a general economic benefit. that evolved into the Works Progress Administration, or WPA, by 1935. Likewise, when the government hires someone to catalog the many It is known today as the very government program that gave rise to the ways of cooking spinach, his tax-supported paycheck cannot be counted new term, “boondoggle,” because it “produced” a lot more than the as a net increase to the economy because the wealth used to pay him was simply diverted, not created. Economists today must still battle this “magical thinking” every time more government spending is proposed—as if money comes not from productive citizens, but rather from the tooth fairy. 58 C. David Tompkins, Senator Arthur H. Vandenberg: The Evolution of a Modern Republican, 1884–1945 (East Lansing, MI: Michigan State University Press, 1970), p. “An Astonishing Rabble Of Impudent Nobodies” 157. 59 Ibid., p. 121. 61 Martin Morse Wooster, “Bring Back the WPA? It Also Had A Seamy Side,” The Wall 60 Albert J. Nock, Our Enemy, the State (www.barefootsworld.net/nockoets1.html), Street Journal, September 3, 1986, p. A26. Chapter 1, Section IV. 62 Ibid.

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Roosevelt’s haphazard economic interventions garnered credit from The stage was set for the 1937–38 collapse with the passage of the people who put high value on the appearance of being in charge and National Labor Relations Act in 1935—better known as the “Wagner “doing something.” Meanwhile, the great majority of Americans were Act” and organized labor’s “Magna Carta.” To quote Sennholz again: patient. They wanted very much to give this charismatic polio victim This law revolutionized American labor relations. It took labor and former New York governor the benefit of the doubt. But Roosevelt disputes out of the courts of law and brought them under a newly always had his critics, and they would grow more numerous as the created Federal agency, the National Labor Relations Board, which years groaned on. One of them was the inimitable “Sage of Baltimore,” became prosecutor, judge, and jury, all in one. Labor union H. L. Mencken, who rhetorically threw everything but the kitchen sink sympathizers on the Board further perverted this law, which at the president. Paul Johnson sums up Mencken’s stinging but often- already afforded legal immunities and privileges to labor unions. humorous barbs this way: The U.S. thereby abandoned a great achievement of Western Mencken excelled himself in attacking the triumphant FDR, whose civilization, equality under the law. whiff of fraudulent collectivism filled him with genuine disgust. He The Wagner Act, or National Labor Relations Act, was passed in was the ‘Fuhrer,’ the ‘Quack,’ surrounded by ‘an astonishing rabble reaction to the Supreme Court’s voidance of NRA and its labor of impudent nobodies,’ ‘a gang of half-educated pedagogues, codes. It aimed at crushing all employer resistance to labor unions. nonconstitutional lawyers, starry-eyed uplifters and other such Anything an employer might do in self-defense became an “unfair sorry wizards.’ His New Deal was a ‘political racket,’ a ‘series of labor practice” punishable by the Board. The law not only obliged stupendous bogus miracles,’ with its ‘constant appeals to class envy employers to deal and bargain with the unions designated as the and hatred,’ treating government as ‘a milch-cow with 125 million employees’ represent ative; later Board decisions also made it teats’ and marked by ‘frequent repudiations of categorical unlawful to resist the demands of labor union leaders.64 pledges.’63 Armed with these sweeping new powers, labor unions went on a Signs of Life militant organizing frenzy. Threats, boycotts, strikes, seizures of plants The American economy was soon relieved of the burden of some of and widespread violence pushed productivity down sharply and the New Deal’s worst excesses when the Supreme Court outlawed the unemployment up dramatically. Membership in the nation’s labor NRA in 1935 and the AAA in 1936, earning Roosevelt’s eternal wrath unions soared: By 1941, there were two and a half times as many and derision. Recognizing much of what Roosevelt did as Americans in unions as had been the case in 1935. Historian William E. unconstitutional, the “nine old men” of the Court also threw out other, Leuchtenburg, himself no friend of free enterprise, observed, “Property- more minor acts and programs which hindered recovery. minded citizens were scared by the seizure of factories, incensed when Freed from the worst of the New Deal, the economy showed some strikers interfered with the mails, vexed by the intimidation of signs of life. Unemployment dropped to 18 percent in 1935, 14 percent nonunionists, and alarmed by flying squadrons of workers who 65 in 1936, and even lower in 1937. But by 1938, it was back up to nearly marched, or threatened to march, from city to city.” 20 percent as the economy slumped again. The stock market crashed An Unfriendly Climate for Business nearly 50 percent between August 1937 and March 1938. The From the White House on the heels of the Wagner Act came a “economic stimulus” of Franklin Delano Roosevelt’s New Deal had thunderous barrage of insults against business. Businessmen, Roosevelt achieved a real “first”: a depression within a depression! fumed, were obstacles on the road to recovery. He blasted them as “economic royalists” and said that businessmen as a class were

Phase IV: The Wagner Act 64 Sennholz, pp. 212-213. 65 William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932–1940 (New 63 Johnson, p. 762. York: Harper and Row, 1963), p. 242.

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“stupid.”66 He followed up the insults with a rash of new punitive 100 percent. He also promoted the lowering of the personal exemption measures. New strictures on the stock market were imposed. A tax on to only $600, a tactic that pushed most American families into paying at corporate retained earnings, called the “undistributed profits tax,” was least some income tax for the first time. Shortly thereafter, Congress levied. “These soak-the-rich efforts,” writes economist Robert Higgs, rescinded the executive order, but went along with the reduction of the “left little doubt that the president and his administration intended to personal exemption.71 push through Congress everything they could to extract wealth from the Meanwhile, the Federal Reserve again seesawed its monetary policy high-income earners responsible for making the bulk of the nation’s in the mid-1930s, first up then down, then up sharply through 67 decisions about private investment.” America’s entry into World War II. Contributing to the economic slide of During a period of barely two months during late 1937, the market 1937 was this fact: From the summer of 1936 to the spring of 1937, the for steel—a key economic barometer—plummeted from 83 percent of Fed doubled reserve requirements on the nation’s banks. Experience capacity to 35 percent. When that news emblazoned headlines, has shown time and again that a roller-coaster monetary policy is Roosevelt took an ill-timed nine-day fishing trip. The New York Herald- enough by itself to produce a roller-coaster economy. Tribune implored him to get back to work to stem the tide of the Still stinging from his earlier Supreme Court defeats, Roosevelt tried renewed Depression. What was needed, said the newspaper’s editors, in 1937 to “pack” the Supreme Court with a proposal to allow the was a reversal of the Roosevelt policy “of bitterness and hate, of setting president to appoint an additional justice to the Court for every sitting 68 class against class and punishing all who disagreed with him.” justice who had reached the age of 70 and did not retire. Had this Columnist Walter Lippmann wrote in March 1938 that “with almost proposal passed, Roosevelt could have appointed six new justices no important exception every measure he [Roosevelt] has been favorable to his views, increasing the members of the Court from 9 to interested in for the past five months has been to reduce or discourage 15. His plan failed in Congress, but the Court later began rubber- the production of wealth.”69 stamping his policies after a number of opposing justices retired. Until As pointed out earlier in this essay, Herbert Hoover’s own version of Congress killed the packing scheme, however, business fears that a a “New Deal” had hiked the top marginal income tax rate from 24 to 63 Court sympathetic to Roosevelt’s goals would endorse more of the old percent in 1932. But he was a piker compared to his tax-happy New Deal prevented investment and confidence from reviving. successor. Under Roosevelt, the top rate was raised at first to 79 Economic historian Robert Higgs draws a close connection between percent and then later to 90 percent. Economic historian Burton Folsom the level of private investment and the course of the American economy notes that in 1941 Roosevelt even proposed a whopping 99.5-percent in the 1930s. The relentless assaults of the Roosevelt administration— marginal r ate o n all incomes o ver $100 ,0 00. “Why not?” he said when in both word and deed—against business, property, and free enterprise an advisor questioned the idea.70 guaranteed that the capital needed to jump-start the economy was After that confiscatory proposal failed, Roosevelt issued an either taxed away or forced into hiding. When FDR took America to war executive order to tax all income over $25,000 at the astonishing rate of in 1941, he eased up on his anti-business agenda, but a great deal of the nation’s capital was diverted into the war effort instead of into plant

66 Ibid., pp. 183-184. expansion or consumer goods. Not until both Roosevelt and the war 67 Robert Higgs, “Regime Uncertainty: Why the Great Depression Lasted So Long and were gone did investors feel confident enough to “set in motion the Why Prosperity Resumed After the War,” The Independent Review, Volume I, Number 4: postwar investment boom that powered the economy’s return to Spring 1997, p. 573. sustained prosperity.”72 68 Gary Dean Best, The Critical Press and the New Deal: The Press Versus Presidential Power, 1933–1938 (Westport, Connecticut: Praeger Publishers, 1993), p. 130. 69 Ibid., p. 136. 70 Burton Folsom, “What’s Wrong With The Progressive Income Tax?”, Viewpoint on Public Issues, No. 99-18, May 3, 1999, Mackinac Center for Public Policy, Midland, 71 Ibid. Michigan. 72 Higgs, p. 564.

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This view gains support in these comments from one of the How was it that FDR was elected four times if his policies were country’s leading investors of the time, Lammot du Pont, offered in deepening and prolonging an economic catastrophe? Ignorance and a 1937: willingness to give the president the benefit of the doubt explain a lot. Uncertainty rules the tax situation, the labor situation, the monetary Roosevelt beat Hoover in 1932 with promises of less government. He situation, and practically every legal condition under which industry instead gave Americans more government, but he did so with fanfare must operate. Are taxes to go higher, lower or stay where they are? and fireside chats that mesmerized a desperate people. By the time they We don’t know. Is labor to be union or non-union? . . . Are we to began to realize that his policies were harmful, World War II came, the have inflation or deflation, more government spending or less? … people rallied around their commander-in-chief, and there was little Are new restrictions to be placed on ca pital, new l imits on profits? . . desire to change the proverbial horse in the middle of the stream by . It is impossible to even guess at the answers.”73 electing someone new. Many modern historians tend to be reflexively anti-capitalist and Along with the holocaust of World War II came a revival of trade distrustful of free markets; they find Roosevelt’s exercise of power, with America’s allies. The war’s destruction of people and resources did constitutional or not, to be impressive and historically “interesting.” In not help the U.S. economy, but this renewed trade did. A reinflation of surveys, a majority consistently rank FDR near the top of the list for the nation’s money supply counteracted the high costs of the New Deal, presidential greatness, so it is likely they would disdain the notion that but brought with it a problem that plagues us to this day: a dollar that the New Deal was responsible for prolonging the Great Depression. But buys less and less in goods and services year after year. Most when a nationally representative poll by the American Institute of importantly, the Truman administration that followed Roosevelt was Public Opinion in the spring of 1939 asked, “Do you think the attitude of decidedly less eager to berate and bludgeon private investors and as a the Roosevelt administration toward business is delaying business result, those investors re-entered the economy and fueled a powerful recovery?” the American people responded “yes” by a margin o f more postwar boom. The Great Depression finally ended, but it should linger in our minds toda y as o n e of t h e most colos sal and tra g ic failures of than 2-to-1. The business community felt even more strongly so.74 government and public policy in American history. In his private diary, FDR’s very own Treasury Secretary, Henry Morgenthau, seemed to agree. He wrote: “We have tried spending The genesis of the Great Depression lay in the irresponsible money. We are spending more than we have ever spent before and it monetary and fiscal policies of the U.S. government in the late 1920s does not work. . . . We have never made good on our promises. … I say and early 1930s. These policies included a litany of political missteps: after eight years of this Administration we have just as much central bank mismanagement, trade-crushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless unemployment as when we started . . . and an enormous debt to boot!”75 destruction of crops and cattle and coercive labor laws, to recount just a At the end of the decade and 12 years after the stock market crash few. It was not the free market that produced 12 years of agony; rather, of Black Thursday, 10 million Americans were jobless. The it was political bungling on a grand scale. unemployment rate was in excess of 17 percent. Roosevelt had pledged in 1932 to end the crisis, but it persisted two presidential terms and Those who can survey the events of the 1920s and 1930s and blame countless interventions later. free-market capitalism for the economic calamity have their eyes, ears and minds firmly closed to the facts. Changing the wrong-headed Whither Free Enterprise? thinking that constitutes much of today’s conventional wisdom about this sordid historical episode is vital to reviving faith in free markets and preserving our liberties. 73 Quoted in Herman E. Krooss, Executive Opinion: What Business Leaders Said and Thought on Economic Issues, 1920s–1960s (Garden City, N.Y.: Doubleday and Co., 1970), The nation managed to survive both Hoover’s activism and p. 200. Roosevelt’s New Deal quackery, and now the American heritage of 74 Higgs, p. 577. 75 Blum, pp. 24-25.

238 A Republic—If We Can Keep It Great Myths of the Great Depression 239 freedom awaits a rediscovery by a new generation of citizens. This time From 2001 to 2005, the Federal Reserve revved up the money supply, we have nothing to fear but myths and misconceptions. expand-ing it at a feverish double-digit rate. The dollar plunged in overseas markets and commodity prices soared. With the banks flush with liquidity from the Fed, interest rates plummeted and risky loans to borrowers of dubious merit ballooned. Politicians threw more fuel on the fire by jawboning banks to lend hundreds of billions of dollars for subprime mortgages. Postscript: Have We Learned Our Lessons? When the bubble burst, some of the very culprits who promoted the Eighty years after the Great Depression began, the literature on this policies that caused it postured as our rescuers while endorsing new painful episode of American history is undergoing an encouraging interventions, bigger government, more inflation of money and credit metamorphosis. The conventional assessment that so dominated and massive taxpayer bailouts of failing firms. Many of them are also historical writings for decades argued that free markets caused the calling for higher taxes and tariffs, the very nonsense that took a debacle and that FDR’s New Deal saved the country. Surely, there are recession in 1930 and made it a long and deep depression. plenty of poorly-informed partisans, ideologues and quacks that still make these superficial claims. Serious historians and economists, The taxpayer bailouts of agencies such as Fannie Mae and Freddie however, have been busy chipping away at the falsehoods. The essay Mac, as well as a growing number of private firms in the early fall of you have just re ad cites many recent works worth careful reading in 2008, represent more folly with a monumental price tag. Not only will their e n tirety. we and future generations be paying those bills for decades, the very process of throwing good money after bad will pile moral hazard on top At the very moment this latest edition of Great Myths of the Great of moral hazard, fostering more bad decisions and future bailouts. This Depression was about to go to press, Simon & Schuster published a is the stuff that undermines both free enterprise and the soundness of splendid new volume I strongly recommend. Authored by the the currency. Much more inflation to pay these bills is more than a little Foundation for Economic Education’s senior historian and Hillsdale likely, sooner or later. College professor, Dr. Burton W. Folsom, the book is provocatively titled New Deal or Raw Deal?—How FDR’s Economic Legacy Has Damaged “Government,” observed the renowned Austrian economist Ludwig America. It’s one of the most illuminating works on the subject. It will von Mises, “is the only institution that can take a valuable commodity help mightily to correct the record and educate our fellow citizens like paper, and make it worthless by applying ink.” Mises was about what really happened in the 1930s. describing the curse of inflation, the process whereby government expands a nation’s money supply and thereby erodes the value of each Another great addition to the literature, appearing in 2007, is The monetary unit—dollar, peso, pound, franc or whatever. It often shows Forgotten Man: A New History of the Great Depression by Amity Shlaes. up in the form of rising prices, which most people confuse with the The fact that it has been a New York Times bestseller suggests there is a inflation itself. The distinction is an important one because, as real hunger for the truth about this period of history. economist Percy Greaves explained so eloquently, “Changing the definition While Americans may be unlearning some of what they thought changes the responsibility.” they knew about the Great Depression, that’s not the same as saying we Define inflation as rising prices and, like the clueless Jimmy Carter have learned the important lessons well enough to avoid making the of the 1970s, you’ll think that oil sheiks, credit cards and private bus- same mistakes again. Indeed, today we are no closer to fixing the inesses are the culprits, and price controls are the answer. Define primarycause of the business cycle—monetary mischief—than we inflation in the classic fashion as an increase in the supply of money and were 80 years ago. credit, with rising prices as a consequence, and you then have to ask the The financial crisis that gripped America in 2008 ought to be a revealing question, “Who increases the money supply?” Only one entity wake-up call. The fingerprints of government meddling are all over it. can do that legally; all others are called “counterfeiters” and go to jail.

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Nobel laureate Milton Friedman argued indisputably that inflation is speculation, but trillions in national debt and politicians who make always and everywhere a monetary matter. Rising prices no more cause misers of drunken sailors and get elected by promising even more are inflation than wet streets cause rain. not factors that should encourage us. Before paper money, governments inflated by diminishing the Inflation is very much with us but it must end someday. A precious-metal content of their coinage. The ancient prophet Isaiah currency’s value is not bottomless. Its erosion must cease either reprimanded the Israelites with these words: “Thy silver has become because govern-ment stops its reckless printing or prints until it wrecks dross, thy wine mixed with water.” Roman emperors repeatedly melted the money. But surely, which way it concludes will depend in large down the silver denarius and added junk metals until the denarius was measure on whether its victims come to understand what it is and less than one percent silver. The Saracens of Spain clipped the edges of where it comes from. Meanwhile, our economy looks like a roller their coins so they could mint more until the coins became too small to coaster because Congresses, Presidents and the agencies they’ve circulate. Prices rose as a mirror image of the currency’s worth. empowered never cease their monetary mischief. Rising prices are not the only consequence of monetary and credit Are you tired of politicians blaming each other, scrambling to cover expansion. Inflation also erodes savings and encourages debt. It under- their behinds and score political points in the midst of a crisis, and mines confidence and deters investment. It destabilizes the economy by piling debts upon debts they audaciously label “stimulus packages”? fostering booms and busts. If it’s bad enough, it can even wipe out the Why do so many Americans want to trust them with their health care, very government responsible for it in the first place and then lead to education, retirement and a host of other aspects of their lives? It’s even worse afflictions. Hitler and Napoleon both rose to power in part madness writ large. The antidote is the truth. We must learn the lessons because of the chaos of runaway inflations. of our follies and resolve to fix them now, not later. All this raises many issues economists have long debated: Who or To that end, I invite the reader to join the education process. what should determine a nation’s supply of money? Why do govern- Support organizations like FEE that are working to inform citizens ments so regularly mismanage it? What is the connection between fiscal about the proper role of government and how a free economy operates. and monetary policy? Suffice it to say here that governments inflate Help distribute copies of this essay and other good publications that because their appetite for revenue exceeds their willingness to tax or promote liberty and free enterprise. Demand that your representatives their ability to borrow. British economist John Maynard Keynes was an in govern-ment balance the budget, conform to the spirit and letter of influential charlatan in many ways, but he nailed it when he wrote, “By the Consti-tution and stop trying to buy your vote with other people’s a continuing process of inflation, governments can confiscate, secretly money. and unobserved, an important part of the wealth of their citizens.” Everyone has heard the sage observation of philosopher George So, you say, inflation is nasty business but it’s just an isolated Santayana: “Those who cannot remember the past are condemned to phenomenon with the worst cases confined to obscure nooks and repeat it.” It’s a warning we should not fail to heed. crannies like Zimbabwe. Not so. The late Frederick Leith-Ross, a famous —LWR, 2010 authority on international finance, observed: “Inflation is like sin; every government denounces it and every government practices it.” Even Americans have witnessed hyperinflations that destroyed two cur- rencies—the ill-fated continental dollar of the R evolutionary Wa r and the doomed C onfederate money of the Civil War. Today’s slow-motion dollar depreciation, with consumer prices rising at persistent but mere single-digit rates, is just a limited version of the same process. Government spends, runs deficits and pays some of its bills through the inflation tax. How long it can go on is a matter of

Chapter Forty-Two

The 1932 Bait-and-Switch

Harry Truman once said, “The only thing new in the world is the history you don’t know.” That observation applies especially well to what tens of millions of Americans have been taught about Franklin Delano Roosevelt, the man under whom Truman served as vice president for about a month. Recent scholarship (including a highly acclaimed book, New Deal or Raw Deal, by FEE senior historian Burton Folsom) is thankfully disabusing Americans of the once-popular myth that FDR saved us from the Great Depression. Another example is a 2004 article by two UCLA economists—Harold L. Cole and Lee E. Ohanian—in the important mainstream Journal of Political Economy. They observed that Franklin Roosevelt extended the Great Depression by seven long years. “The economy was poised for a beautiful recovery,” the authors show, “but that recovery was stalled by these misguided policies.” In a commentary on Cole and Ohanian’s research, Loyola University economist Thomas DiLorenzo pointed out that six years after FDR took office, unemployment was almost six times the pre-Depression level.

244 A Republic—If We Can Keep It The 1932 Bait-and-Switch 245

Per capita GDP, personal consumption expenditures, and net private assailed it for raising taxes and tariffs? Roosevelt did. FDR’s running investment were all lower in 1939 than they were in 1929. mate, John Nance Garner, even declared that Hoover “was leading the “The fact that it has taken ‘mainstream’ neoclassical economists so country down the road to socialism.” long to recognize [that FDR’s policies exacerbated the disaster],” notes Copying Hoover and the Socialists DiLorenzo, “is truly astounding,” but still “better late than never.” It was socialist Norman Thomas, not Franklin Roosevelt, who Part of the Great FDR Myth is the notion that he won the presidency proposed massive increases in federal spending and deficits and in 1932 with a mandate for central planning. My own essay on this sweeping interventions into the private economy—and he barely period (Great Myths of the Great Depression) argued otherwise, based on mustered 2 percent of the vote. When the dust settled, Warburg shows, the very platform and promises on which FDR ran. But until a few we got what Thomas promised, more of what Hoover had been months ago I was unaware of a long-forgotten book that makes the case lambasted for, and almost nothing that FDR himself had pledged. FDR as well as any. employed more “master minds” to plan the economy than perhaps all Hell Bent for Election was written by James P. Warburg, a banker previous presidents combined. who witnessed the 1932 election and the first two years of Roosevelt’s After detailing the promises and the duplicity, Warburg offered this first term from the inside. Warburg, the son of prominent financier and assessment of the man who betrayed him and the country: Federal Reserve cofounder Paul Warburg, was no less than a high-level Much as I dislike to say so, it is my honest conviction that Mr. financial adviser to FDR himself. Disillusioned with the President, he left Roosevelt has utterly lost his sense of proportion. He sees himself as the administration in 1934 and wrote his book a year later. the one man who can save the country, as the one man who can Warburg voted for the man who said this on March 2, 1930, as “save capitalism from itself,” as the one man who knows what is governor of New York: good for us and what is not. He sees himself as indispensable. And The doctrine of regulation and legislation by “master minds,” in when a man thinks of himself as being indispensable . . . that man is whose judgment and will all the people may gladly and quietly headed for trouble. acquiesce, has been too glaringly apparent at Washington during Was FDR an economic wizard? Warburg reveals nothing of the sort, these last ten years. Were it possible to find “master minds” so observing that FDR was “undeniably and shockingly superficial about unselfish, so willing to decide unhesitatingly against their own anything that relates to finance.” He was driven not by logic, facts, or personal interests or private prejudices, men almost godlike in their humility but by “his emotional desires, predilections, and prejudices.” ability to hold the scales of justice with an even hand, such a “Mr. Roosevelt,” wrote Warburg, “gives me the impression that he government might be to the interests of the country; but there are can really believe what he wants to believe, really think what he wants none such on our political horizon, and we cannot expect a complete to think, and really remember what he wants to remember, to a greater reversal of all the teachings of history. extent than anyone I have ever known.” Less charitable observers might What Warburg and the country actually elected in 1932 was a man diagnose the problem as “delusions of grandeur.” whose subsequent performance looks little like the platform and “I believe that Mr. Roosevelt is so charmed with the fun of promises on which he ran and a lot like those of that year’s Socialist brandishing the band leader’s baton at the head of the parade, so Party candidate, Norman Thomas. pleased with the picture he sees of himself, that he is no longer capable Who campaigned for a “drastic” reduction of 25 percent in federal of recognizing that the human power to lead is limited, that the ‘new spending, a balanced federal budget, a rollback of government intrusion ideas’ of leadership dished up to him by his bright young men in the into agriculture, and restoration of a sound gold currency? Roosevelt Brain Trust are nothing but old ideas that have been tried before, and did. Who called the administration of incumbent Herbert Hoover “the that one cannot uphold the social order defined in the Constitution and greatest spending administration in peace time in all our history” and at the same time undermine it,” Warburg lamented.

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So if Warburg was right (and I believe he was), Franklin Delano Roosevelt misled the country with his promises in 1932 and put personal ambition and power lust in charge—not a very uncommon thing as politicians go. In any event, the country got a nice little bait- and-switch deal, and the economy languished as a result. 43 In the world of economics and free exchange, the rule is that you get what you pay for. The 1932 election is perhaps the best example of the rule that prevails all too often in the political world: You get what you voted against. —LWR, June 2010

Chapter Forty-Three

Child Labor and the British Industrial Revolution

Everyone agrees that in the 100 years between 1750 and 1850 there took place in Great Britain profound economic changes. This was the age of the Industrial Revolution, complete with a cascade of technical innovations, a vast increase in industrial production, a renaissance of world trade, and rapid growth of urban populations. Where historians and other observers clash is in the interpretation of these great changes. Were they “good” or “bad”? Did they represent improvement to the citizens, or did these events set them back? Perhaps no other issue within this realm has generated more intellectual heat than the one concerning the labor of children. The enemies of freedom—of capitalism—have successfully cast this matter as an irrefutable indictment of the capitalist system as it was emergin g in nineteenth-century Britain. The many reports of poor working conditions and long hours of difficult toil make harrowing reading, to be sure. William Cooke Taylor wrote at the time about contemporary reformers who, witnessing children at work in factories, thought to themselves, “How much more delightful would have been the gambol of the free limbs on the hillside;

248 A Republic—If We Can Keep It Child Labor and the British Industrial Revolution 249 the sight of the green mead with its spangles of buttercups and daisies; Private factory owners could not forcibly subjugate “free-labour” the song of the bird and the humming of the bee.” 76 children; they could not compel them to work in conditions their Of those historians who have interpreted child labor in industrial parents found unacceptable. The mass exodus from the socialist Britain as a crime of capitalism, none have been more prominent than J. Continent to increasingly capitalist, industrial Britain in the first half of th L. and Barbara Hammond. Their many works, including Lord the 19 century strongly suggests that people did indeed find the Shaftesbury (1923), The Village Labourer (1911), The Town Labourer industrial order an attractive alternative. And no credible evidence (1917), and The Skilled Labourer (1919) hav e been widely promoted as exists w h ich argues that parents in th ese early capitalist days were any “authoritative” on the issue. less caring of their offspring than those of pre-capitalist times. The Hammonds divided the factory children into two classes: The situation, however, was much different for “apprentice” “apprentice children” and “free-labour children.” It is a distinction of children, and close examination reveals that it was these children on enormous significance, though one the authors themselves failed utterly whom the critics were focusing when they spoke of the “evils” of to appreciate. Once having made the distinction, the Hammonds capitalism’s Industrial Revolution. These youngsters, it turns out, were proceeded to treat the two classes as though no distinction between under the direct authority and supervision not of their parents in a free them existed at all. A deluge of false and misleading conclusions about labor market, but of government officials. Many were orphans; a few capitalism and child labor has poured forth for years as a consequence. were victims of negligent parents or parents whose health or lack of skills kept them from earning sufficient income to care for a family. All were in the custody of “parish authorities.” As the Hammonds wrote, “. . Opportunity or Oppression? . the first mills were placed on streams, and the necessary labour was provided by the importation of cartloads of pauper children from the “Free-labour” children were those who lived at home but worked workhouses in the big towns. London was an important source, for during the days in factories at the insistence of their parents or since the passing of Hanway’s Act in 1767 the child population in the guardians. British historian E. P. Thompson, though generally critical of workhouses had enormously increased, and the parish authorities were the factory system, nonetheless quite properly conceded that “it is anxious to find relief from the burden of their maintenance . . . . To the perfectly true that the parents not only needed their children’s parish authorities, encumbered with great masses of unwanted earnings, but expected them to work.”77 children, the new cotton mills in Lancashire, Derby, and Notts were a Professor Ludwig von Mises, the great Austrian economist; put it godsend.”79 well when he noted that the generally deplorable conditions extant for The Hammonds proceed to report the horrors of these mills with centuries before the Industrial Revolution, and the low levels of descriptions like these: “crowded with overworked children,” “hotbeds productivity which created them, caused families to embrace the new of putrid fever,” “monotonous toil in a hell of human cruelty,” and so opportunities the factories represented: “It is a distortion of facts to say forth. Page after page of the Hammonds’ writings—as well as those of that the factories carried off the housewives from the nurseries and the many other anti-capitalist historians—deal in this manner with the kitchens and the children from their play. These women had nothing to condition of these parish apprentices. Though consigned to the control cook with and to feed their children. These children were destitute and of a government authority, these children are routinely held up as starving. Their only refuge was the factory. It saved them, in the strict victims of the “capitalist order.” sense of the term, from death by starvation.”78 Historian Robert Hessen is one observer who has taken note of this historiographical mischief and has urged others to acknowledge the 7676 William Cooke Taylor, The Factory System (London, 1844), pp. 2.3-24. error. The parish apprentice children, he writes, were “sent into virtual 77 E. P Thompson, The Making of the English Working Class (New York: Random House, 1964), p. 339. 78 Ludwig von Mises, Human Action (New Haven, Connecticut: Yale University Press, 79 J. L and Barbara Hammond, The Town Labourer (London: Longmans, Green, and Co., 1949). p. 615. 1917), pp. 144.45.

250 A Republic—If We Can Keep It Child Labor and the British Industrial Revolution 251 slavery by the parish authorities, a government body: they were The Apprentice Bill that Gaskell mentioned was passed in 1802, the deserted or orphaned pauper children who were legally under the first of the much-heralded factory legislation, the very one Hessen custody of the poor-law officials in the parish, and who were bound by stresses was aimed at the abuse by the parish officials. It remains that these officials into long terms of unpaid apprenticeship in return for a capitalism is not a system of compulsion. The lack of physical force, in bare subsistence.”80 Indeed, Hessen points out, the first Act in Britain fact, is what distinguishes it from pre-capitalist, feudal times. When that applied to factory children was passed to protect these very parish feudalism reigned, men, women, and children were indeed “sold” at apprentices, not “free-labour” children. auction, forced to work long hours at arduous manual labor, and compelled to toil under whatever conditions and for whatever compensation pleased their masters. This was the system of serfdom, The Role of the State and the deplorable system of parish apprenticeship was a remnant of It has not been uncommon for historians, including many who lived Britain’s feudal past. and wrote in the 19th century, to report the travails of the apprentice The emergence of capitalism was sparked by a desire of Englishmen children without ever realizing they were effectively indicting to rid themselves of coercive economic arrangements. The free laborer government, not the economic arrangement of free exchange we call increasingly supplanted the serf as capitalism blossomed. It is a gross capitalism. In 1857, Alfred Kydd published a two-volume work entitled and most unfortunate distortion of history for anyone to contend that The History of the Factory Movement. He speaks of “living bodies caught capitalism or its industrialization was to blame for the agony of the in the iron grip of machinery in rapid motion, and whirled in the air, apprentice children. bones crushed, and blood cast copiously on the floor, because of physical exhaustion.” Then, in a most revealing statement, in which he Though it is inaccurate to judge capitalism guilty of the sins of refers to the children’s “owners,” Kydd declares that “The factory parish apprenticeship, it would also be inaccurate to assume that free- apprentices have been sold by auction as ‘bankrupt’s effects.”81 labor children worked under ideal conditions in the early days of the [Emphasis added.] Industrial Revolution. By today’s standards, their situation was clearly bad. Such capitalist achievements as air conditioning and high levels of A surgeon by the name of Philip Gaskell made extensive productivity would, in time, substantially ameliorate it, however. The observations of the physical condition of the manufacturing population evidence in favor of capitalism is thus compellingly suggestive: From in the 1830s. He published his findings in a book in 1836 entitled 1750 to 1850, when the population of Great Britain nearly tripled, the Artisans and Machinery. The casual reader would miss the fact that, in exclusive choice of those flocking to the country for jobs was to work for his revelations of ghastly conditions for children, he was referring to the private capitalists. parish apprentices: “That glaring mismanagement existed in numberless instances there can be no doubt; and that these unprotected creatures, thus thrown entirely into the power of the The Sadler Report manufacturer, were overworked, often badly-fed, and worse treated. No A discussion of child labor in Britain would be incomplete without wonder can be felt that these glaring mischiefs attracted observation, some reference to the famous Sadler Report. Written by a Member of and finally, led to the passing of the Apprentice Bill, a bill intended to Parliament in 1832 and filled with stories of brutality, degradation, and 82 regulate these matters.” Oppression against factory workers of all ages and status, it became the bible for indignant reformers well into the 20th century. The Hammonds 80 Robert Hessen, “The Effects of the Industrial Revolution on Women and Children,” in described it as “one of the main sources of our knowledge of the Ayn Rand, Capitalism: The Unknown Ideal (New York: New American Library, 1967), p, conditions of factory life at the time. Its pages bring before the reader in 106. the vivid form of dialogue the kind of life that was led by the victims of 81 Alfred Kydd, The History of the Factory Movement (New York: Burr Franklin, n.d.), pp. 21-22. 82 Philip Gaskell, Artisans and Machinery (New York: Augustus M. Kelley, 1968), p. 141.

252 A Republic—If We Can Keep It Child Labor and the British Industrial Revolution 253 the new system.” 83 Two other historians, B. L. Hutchins and A. Harrison, Gaskell admitted a short time after one of them had passed that it describe it as “one of the most valuable collections of evidence on “caused multitudes of children to be dismissed, but it has only increased industrial conditions that we possess.”84 the evils it was intended to remedy, and mstu of neessity c be 88 W. H. Hutt, in his essay, “The Factory System of the Early Nineteenth repealed.” Century,” reveals that bad as things were, they were never nearly so bad Hurt believes that “in the case of children’s labor the effects [of as the Sadler Report would have one believe. Sadler, it turns out, had restrictive laws] went further than the mere loss of their work; they lost been agitating for passage of the Ten Hours’ Bill, and in doing so he their training and, consequently, theft skill as adults.”89 employed every cheap political trick in the book, including the Conditions of employment and sanitation were best, as the Factory 85 falsification of evidence. The report was part of those tactics. Commission of 1833 documented, in the larger and newer factories. The Hutt quotes R. H. Greg (author of The Factory Question, 1837), who owners of these larger establishments, which were more easily and accused Sadler of giving to the world “such a mass of ex-parte frequently subject to visitation and scrutiny by inspectors, increasingly statements, an d o f gross f a lsehoo d s and c a lumnies . . . as p robably never chose to dismiss children from employment rather than be subjected to before found their way into any public document.”86 elaborate, arbitrary, and ever-changing rules on how they might run a This view is shared by no less an anti-capitalist than Friedrich factory employing youths. The result of legislative intervention was that Engels, partner of Karl Marx. In his book, The Condition of the Working these dismissed children, most of whom needed to work in order to Classes in England, Engels says this of the Sadler Report: “This is a very survive, were forced to seek jobs in smaller, older, and more out-of-the- partisan document, which was drawn up entirely by enemies of the way places where sanitation, lighting, and safety were markedly 90 factory system for purely political purposes. Sadler was led astray by inferior. Those who could not find new jobs were reduced to the his passionate sympathies into making assertions of a most misleading status of their counterparts a hundred years before, that is, to irregular and erroneous kind. He asked witnesses questions in such a way as to and grueling agricultural labor, or worse—in the words of Mises— elicit answers which, although correct, nevertheless were stated in such “infested the country as vagabonds, beggars, tramps, robbers, and prostitutes.”91 a form as to give a wholly false impression.”87 As already explained, the first of the factory legislation was an act of So it is that child labor was relieved of its worst attributes not by mercy for the enslaved apprentice children. Successive acts between legislative fiat, but by the progressive march of an ever more 1819 and 1846, however, placed greater and greater restrictions on the productive, capitalist system. Child labor was virtually eliminated when, employment of free-labor children. Were they necessary to correct for the first time in history, the productivity of parents in free labor alleged “evils of industrialization”? markets rose to the point that it was no longer economically necessary for children to work in order to survive. The emancipators and The evidence strongly suggests that whatever benefits the benefactors of children were not legislators or factory inspectors, but legislation may have produced by preventing children from going to factory owners and financiers. Their efforts and investments in work (or raising the cost of employing them) were marginal, and machinery led to a rise in real wages, to a growing abundance of goods probably were outweighed by the harm the laws actually caused. at lower prices, and to an incomparable improvement in the general standard of living. 83 J. L. and Barbara Hammond, Lord Shaftesbury (London: Constable, 1923), p. 16. Of all the interpretations of industrial history, it would be difficult to 84 B. L. Hutchins and A. Harrison, A History of Factory Legislation (New York: Augustus M. Kelley, 1966), p. 34. find one more perverse than that which ascribes the suffering of 85 W. H. Hurt, “The Factory System of the Early Nineteenth Century,” in F. A. Hayek ed., Capitalism and the Historians (Chicago: University of Chicago Press, 1954), pp. 15684. 88 Gaskell, p. 67. 86 Ibid., p. 158. 89 Hutt, p. 182. 87 Friedrich Engels, The Condition of the Working Classes in England (New York: 90 Hessen. p. 106. Macmillan; 1958), p. 192. 91 Mises, p. 614.

254 A Republic—If We Can Keep It children to capitalism and its Industrial Revolution. The popular critique of child labor in industrial Britain is unwarranted, misdirected propaganda. The Hammonds and others should have focused on the activities of government, not capitalists, as the source of the children’s plight. It is a confusion which has unnecessarily taken a heavy toll on 44 the case for freedom and free markets. On this issue, it is long overdue for the friends of capitalism to take the ideological and historiographical offensive. —LWR, April 1991

Chapter Forty-Four

Government, Poverty and Self-Reliance: Wisdom From 19th Century Presidents

I can hardly give a speech about presidents without citing a witty remark from an old friend of mine from Tennessee, humorist Tom Anderson. He once said, back in the 1970s, “Franklin Roosevelt proved a man could be president a lifetime; Harry Truman proved any man could be president; Dwight Eisenhower proved we really didn’t need one; and every president since proved that it was dangerous to have one.” Funny, but there’s a kernel of truth there! Here’s a quotation from an American president. Who do you think it was? The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of sound policy. It is in violation of the traditions of America.

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Those were not the words of a 19th century president. They came The problem was neatly summarized once again by Tom Anderson, from the lips of our 32nd chief executive, Franklin Delano Roosevelt, in whose vignette on recent presidents I cited earlier. Anderson said the his State of the Union Address on Jan. 4, 1935. A moment later, he “welfa r e state” got its name b ecause, “The politicians get well, while declared, “The Federal Government must and shall quit this business of everybody else pays the fare.” relief.” 2. The bureaucracy—the armies of professional poverty fighters We all know that it didn’t. Indeed, 30 years later Lyndon Johnson whose jobs and empires always seemed secure regardless of the actual would take “this business of relief” to new and expensive heights in an effects of the programs they administered. Economist Walter Williams official “War on Poverty.” Another 30 years and more than $5 trillion in put it well when he described this as “feeding the sparrows through the federal welfare later, a Democratic president in 1996 would sign a bill hores.”s Williams also famously observed, “A lot of people went to into law that ended the federal entitlement to welfare. As Ronald Washington (D.C.) to do good, and apparently have done very well.” Reagan, a far wiser man, observed long before it dawned on Bill Clinton, “We fought a war on poverty, and poverty won.” Liberty: The Real War on Poverty What Reagan instinctively knew, Bill Clinton finally admitted and FDR preached but didn’t practice was that government poverty An unabashed, unrepentant welfare statist would probably survey programs are themselves poverty-stricken. We have paid an awful price the men who held the highest office in the land during the 19th century in lives and treasure to learn some things that the vast majority of and dismiss them as heartless, uncaring and hopelessly medieval. Even Americans of the 19th century—and the chief executives they elected— during the severe depressions of the 1830s and the 1890s, Presidents could have plainly told us: Government welfare or “relief” programs Martin Van Buren and Grover Cleveland never proposed that encouraged idleness, broke up families, produced intergenerational Washington, D.C., extend its reach to the relief of private distress dependency and hopelessness, cost taxpayers a fortune and yielded broadly speaking, and they opposed even the smallest suggestions of harmful cultural pathologies that may take generations to cure. that kind. The failure of the dole was so complete that one journalist a decade Welfare statists make a crucial error, however, when they imply ago posed a question to which just about everybody knows the answer that it was left to presidents of a more enlightened 20th century to and the lesson it implies. “Ask yourself,” wrote John Fund of The Wall finally care enough to help the poor. The fact is, our leaders in the 1800s Street Journal, “If you had a financial windfall and wanted to help the did mount a war on poverty—the most comprehensive and effective poor, would you even think about giving time or a check to the ever mounted by any central government in world history. It just didn’t gov ernment?” have a gimmicky name like “Great Society,” nor did it have a public relations office and elitist poverty conferences at expensive seaside th The pre-eminent beneficiaries of the whole 20 century experiment resorts. If you could have pressed them then for a name for it, most if in federal poverty-fighting were not those whom the programs not all of those early chief executives might well have said their anti- ostensibly were intended to help. Rather, those beneficiaries were poverty program was, in a word, liberty. This word meant things like primarily two other groups: self-reliance, hard work, entrepreneurship, the institutions of civil 1. Politicians who got elected and re-elected as champions of the society, a strong and free economy, and government confined to its needy and downtrodden. Some were sincere and well-meaning. Others constitutional role as protector of liberty by keeping the peace. were cynical, ill-informed, short-sighted and opportunistic. All were deluded into traveling paths down which not a single administration of the 19th century ever ventured—the use of the public treasury for James Madison widespread handouts to the needy. In hindsight, it’s a little amazing that the last great president of the 19th century, Grover Cleveland, was just about as faithful to that legacy of liberty as the first great one of that century, Thomas Jefferson. When

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Cleveland left office in March 1897, the federal government was still In his first Inaugural Address in 1801, Jefferson gave us a splendid many yeas r away from any sotr of n ational proramfor g pblic u summation of what government should do. It did not describe welfare payments to the indigent. programs, but rather, “A wise and frugal government, which shall To be sure, the Washington, D.C., establishment was bigger than restrain men from injuring one another, shall leave them otherwise free Jefferson had left it in many other respects—alarmingly so, in most cases. to regulate their own pursuits of industry and improvement, and shall But it was not yet even remotely a welfare state. Regardless of political not take from the mouth of labor the bread it has earned. This is the party, the presidents of that period did not read into the Constitution any of sum of good government.” the modern-day welfare-state assumptions. They understood these A similar view was held by James Madison, a key figure in the con- essential verities: Government has nothing to give anybody except what it struction of the Constitution, a prime defender of it in The Federalist first takes from somebody, and a government big enough to give the people Papers and our fourth president. Madison vetoed bills for so-called everything they want is big enough to take away everything they’ve got. “internal improvements,” such as roads, at federal expense, so it would These chief executives had other things going for them, too—notably, a have been inconceivable to Madison that it was constitutional to use the humbling faith in Divine Providence, and a healthy confidence in what a power of government to take from some people and give to others free and compassionate people could do without federal help. because the others were poor and needed it. While there might be a And what a poverty program liberty proved to be! In spite of a reasonable, even constitutional, case for certain federal road-building horrendous civil war, half a dozen economic downturns and wave after projects for national defense purposes (or at least the benefit of wave of impoverished immigrants, America progressed from near- everyone), for Madison and Jefferson there was no constitutional case universal poverty at the start of the century to within reach of the world’s to be made for assistance to individuals in poverty. highest per-capita income at the end of the century. The poverty that In a speech in the U.S. House of Representatives years before he remained stood out like the proverbial sore thumb because it was now the became president, Madison declared: “The government of the United exception, no longer the rule. In the absence of stultifying government States is a definite government, confined to specified objects. It is not welfare programs, our free and self-reliant citizenry spawned so many like state governments, whose powers are more general. Charity is no private, distress-relieving initiatives that American generosity became one part of the legislative duty of the government.” of the marvels of the world. This essentially spontaneous, non-centrally- planned “war on poverty” stands in stark contrast to Lyndon Johnson’s “Great Society” because it actually worked. Honoring the Rules My assistant in preparing this paper, a Grove City College senior Why didn’t Jefferson, Madison and other American presidents of the named Christopher Haberman, expressed in an e-mail to me a little 19th century simply stretch the Constitution until it included poverty frustration at what he was not finding as he researched the papers of assistance to individuals? Why does it seem to have hardly ever Thomas Jefferson and James Madison. He wrote: “I was disappointed to occurre d to them? Many factors and reasons explain this, but this one find that there were not many direct references to poverty. It seems was paramount: Such power was not to be found in the rule book. that (they) were more concerned with Barbary pirates. They had no Let me elaborate. Imagine playing a game—baseball, gin rummy, concept of (direct) government aid to the impoverished.” Monopoly or whatever—in which there is only one rule: anything goes. Haberman was right. Consider Jefferson—the author of the Declar- What kind of a game would this be? Chaotic, frustrating, unpredict- ation of Independence, America’s third president, and someone who able, impossible. Eventually, the whole thing would degenerate into a exerted enormous intellectual influence during this country’s formative free-for-all. And while simple games would be intolerable if played this years. His were the first two presidential terms of America’s first full way, the consequences for the many deadly serious things humans century as a nation. His election in 1800 marked a turning point from engage in—from driving on the highways to waging war—would be 12 years of Federalist Party rule and set the tone for decades to follow. almost too frightful to imagine.

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The most profound political and philosophical trend of our time is a federal court, charging that the congressional action constituted serious erosion of any consensus about what government is supposed censorship and denial of a basic right. to do and what it is not supposed to do. But this was not so in Jefferson The lofty notion that individuals possess certain rights—definable, and Madison’s day. The “instruction books” at that time were America’s inalienable and sacred—has been cheapened beyond anything our founding documents, namely the Declaration of Independence and the Founders and early presidents would recognize. When those gifted Constitution, including the Bill of Rights. In the spirit of those great thinkers asserted rights to “freedom of speech,” “freedom of the press” works, most Americans shared a common view of “the sum of good or “freedom of assembly,” they did not mean to say that one has a right government”—the protection of life and property. to be given a microphone, a printing press, a lecture hall or a Playboy Today, far too many people think that government exists to do magazine at someone else’s expense. anything for anybody at any time they ask for it, from children’s day Indeed, their concept of rights did not require the initiation of force care to handouts for artists. Texas congressman Ron Paul is noted for against others, or the elevation of any “want” to a lawful lien on the life blowing the whistle whenever a bill is proposed that violates the spirit or property of any other citizen. Each individual was deemed a unique or the letter of the Constitution, but quite often he does so all by himself. and sovereign being, who required only that other citizens deal with How are his appeals received by the great majority of other members of him honestly and voluntarily or not at all. It was this notion of rights Congress? “Like water off a duck’s back,” he once told me. that became an important theme of America’s founding documents and I once gave a series of lectures to high school seniors, and I asked early presidencies. It is the only notion of rights that does not produce the students what they thought the responsibilities of government an unruly mob in which each person has his hands in someone else’s were. I heard “provide jobs” or “take care of the poor” far more often pocket. than I heard anything like “safeguard our freedoms.” (In fact, I think the This wisdom prompted early Americans to add a Bill of Rights to a only time I heard the latter was when I said it myself.) Constitution that already contained a separation of government powers, A while back, an organization called the Communitarian Network checks and balances, and numerous “thou-shalt-nots” directed at made news when it called for the federal government to make organ government itself. They knew—unlike tens of millions of Americans donations mandatory, so that each citizen’s body after death could be today—that a government that lacks narrow rules and strict “harvested” for the benefit of sick people. Like ending poverty, helping boundaries, that robs Peter to pay Paul, that confuses rights with wants, sick people is a good cause, but is it really a duty of government to take will yield financial ruin at best and political tyranny at worst. your kidneys? Jefferson, Madison and almost all of the succeeding 20 presidents of You can imagine how Jefferson and Madison might have answered the 19th century were constrained by this view of the federal such a question. In their day, Americans appreciated the concept of government, and most of them were happy to comply with it. When individual rights and entertained very little of this nonsense. But there doing so, they were faithful to their charge. They were true poverty is no consensus today even on what a right is, let alone which ones free fighters, because they knew that if liberty were not preserved, poverty citizens have. woudl be the least of our troubles. They had read the rule book, and Years ago when the Reagan administration proposed abolishing they knew the importance of following the rules. subsidies to Amtrak, the nationalized passenger rail service, I was struck by a dissenter who phrased her objection on national television “Plain and Simple Duties” this way: “I don’t know how those people in Washington expect us to get around out here. We have a right to this service.” Andrew Jackson, whose tenure stretched from 1829 to 1837, was our seventh president and an exceedingly popular one. He, too, Once when Congress voted to stop funding the printing of Playboy reminded Congress frequently in Jeffersonian terms what the federal magazine in Braille, the American Council of the Blind filed suit in role was. In his fourth annual message on Dec. 4, 1832, he wrote:

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“Limited to a general superintending power to maintain peace at It is a testament to the lack of federal welfare-style programs during home and abroad, and to prescribe laws on a few subjects of general more than 60 years under our first 13 presidents that Pierce, our 14th, interest not calculated to restrict human liberty, but to enforce human termed as “novel” the very idea of “providing for the care and support of rights, this government will find its strength and its glory in the faithful all those among the people of the United States who by any form of discharge of these plain and simple duties.” calamity become fit objects of public philanthropy.” In his second Inaugural Address three months later, Jackson again Meanwhile, the poor of virtually every other nation on the planet underscored the federal government’s limited mission. He said: were poor because of what governments were doing to them, often in (I)t will be my aim to inculcate by my official acts the necessity of the name of doing something for them: taxing and regulating them into exercising by the General Government those powers only that are penury; seizing their property and businesses; persecuting them for clearly delegated; to encourage simplicity and economy in the their faith; torturing and killing them because they held views different expenditures of the Government; to raise no more money from the from those in power; and squandering their resources on official luxury, people than may be requisite for these objects, and in a manner that mindless warfare and wasteful boondoggles. America was about will best promote the interests of all classes of the community and government not doing such things to people—and that one fact was, all of all portions of the Union. by itself, a powerfully effective anti-poverty program. As if to head off any misunderstandings about the role of the federal government, Jackson went on to say, “To suppose that because our “The Art of Associating Together” Government has been instituted for the benefit of the people it must Americans of all colors pulled themselves out of poverty in the 19th therefore have t he power to d o what ever may seem to conduce to the century by creating wealth through invention and enterprise. As they public good is an error into which even honest minds are too apt to fall.” did so, they generously gave much of their income—along with their Compared to giants like Jefferson, Madison and Jackson, Franklin time and personal attention—to the aid of their neighbors and Pierce of New Hampshire is often thought of as a mere cipher. But he communities. When the French social commentator Alexis de was another in a long string of 19th century American presidents who Tocqueville visited a young, bustling America during the Jackson had their heads on straight when it came to the matter of federal admini s tration in the 1830 s, he cite d the v ibrancy of this “civil society” poverty assistance. Among his nine vetoes was one in 1854 that nixed a as one of our greatest assets. bill to help the mentally ill. Here’s what Pierce said: De Tocqueville was amazed that Americans were constantly It can not be questioned that if Congress has power to make forming “associations” to advance the arts, build libraries and hospitals, provision for the indigent insane . . . it has the same power to and meet social needs of every kind. If something good needed to be provide for the indigent who are not insane, and thus to transfer to done, it didn’t occur to Andrew Jackson or his fellow citizens to expect the Federal Government the charge of all the poor in all the States. It politicians and bureaucrats, who were distant in both space and spirit, has the same power to provide hospitals and other local to do it for them. “Among the laws that rule human societies,” wrote de establishments for the care and cure of every species of human Tocqueville in “Democracy in America,” “there is one which seems to be infirmity, and thus to assume all that duty of either public more precise and clear than all others. If men are to rema in civilized or philanthropy, or public necessity to the dependent, the orphan, the to become so, the art of associating together must grow and improve. . . .” sick, or the needy which is now discharged by the States themselves Indeed, this “art of associating together” in the 19th century pro- or by corporate institutions or private endowments existing under duced the most remarkable flowering of private charitable assistance the legislation of the States. The whole field of public beneficence is ever seen. This era saw the founding of many of America’s most notable, thrown open to the care and culture of the Federal Government. . . . lasting private associations—from the Salvation Army to the Red Cross. If Congress may and ought to provide for any one of these objects, it may and ought to provide for them all.

264 A Republic—If We Can Keep It Wisdom From 19th Century Presidents 265

For many reasons, such groups are far more effective in solving most generous people on earth. Christians specifically viewed personal, social problems—poverty, homelessness and illiteracy, for instance— charitable involvement as “servanthood” commanded of them by Christ. than are government programs. They are more likely to get to the root of problems that stem from spiritual, attitudinal and behavioral deficiencies. They are also more inclined to demand accountability, “No More Were Needed” which means they won’t simply cut a check every two weeks without Consider a story that I first learned from the eminent Hillsdale expecting the recipient to do something in return and change College historian Burton Folsom, a good friend of mine. destructive patterns of behavior. Ultimately, private associations also In 1881, a raging fire swept through the state of Michigan’s “Thumb” tend to promote self-reliance, instead of dependency. area, killing nearly 200 people and destroying more than 1 million acres And if these groups don’t produce results, they usually wither; the of timberland. “The flames ran faster than a horse could gallop,” said parishioners or others who voluntarily support them will put their one survivor of the devastating blaze. Its hurricane-like fury uprooted money elsewhere. In contrast, when a government program fails to trees, blew away buildings and destroyed millions of dollars of property perform, its lobbyists make a case for more funding. Worse, they usually across four counties. get it. This disaster produced an outpouring of generosity from Americans From start to finish, what private charities do represents a everywhere. In fact, the Michigan fire became the first disaster relief manifestation of free will. No one is compelled to provide assistance. No effort of Clara Barton and the newly formed American Red Cross. As the one is coerced to pay for it. No one is required to accept it. All parties smoke billowed eastward across the nation, Barton’s hometown of come together of their own volition. Dansville, N.Y., became a focal point of relief. According to the officers of And therein lies the magic of it all! The link between the giver, the the Dansville Red Cross, a call f rom Clara Barton “rallied us to our provider and the receiver is strong precisely because each knows he can work.” walk away from it at the slightest hint of insincerity, broken promises “Instantly,” they said, “we felt the help and strength of our or poor performance. Because each party gives his own time or organization (the Red Cross), young and untried as it was.” Men, women resources voluntarily, he tends to focus on the mission and doesn’t get and children throughout western New York brought food, clothing and bogged down in secondary agendas, like filling out the proper other gifts. Before the Red Cross would send them to Michigan, a paperwork or currying favor with those in power. committee of ladies inspected each item and restitched garments or Management expert Peter Drucker summed it up well when he said replaced food when necessary. that priv a te c h arities, bo t h faith-based and secular, “spend far less for Speed was important, not only because many were hungry, but also results than governments spend for failure.” because winter was approaching. Bedding and heavy clothing were in Men and women of faith—whether Christian, Jewish, Muslim or demand. Railroads provided the shipping. People left jobs and homes something else—should be the first to argue that God doesn’t need and trekked to Michigan to get personally involved in the rebuilding. federal funds to do His work. When they get involved in charitable Soon, the Red Cross in New York and the local relief committees in work, it’s usually with the knowledge that a change of heart will often Michigan were working together to distribute supplies until “no more do more to conqure poverty than a welfare check. They focus o n were needed,” according to the final report from the Red Cross. changing hearts, one heart at a time. The Red Cross’ assistance was much appreciated. And it made That’s the way most Americans thought and behaved in the 19th disaster relief faster, more efficient and national in scope. century. They would have thought it a cop-out of the first order to pass But even if such help had not come, Michiganians were prepared to these responsibilities on to politicians. Instead, Americans became the organize relief voluntarily within the state. During an 1871 fire that left nearly 3,000 Michigan families homeless, Gov. Henry Baldwin

266 A Republic—If We Can Keep It Wisdom From 19th Century Presidents 267 personally organized the relief efforts and gave about $150,000 out of Cleveland thought it was an act of fundamental dishonesty for some his own pockets—a sum equivalent to more than $3 million today. Few, to use government for their own benefit at everyone else’s expense. if any, thought it necessary to create a federal relief bureaucracy. Accord ingly, he took a firm stand against some early stirrings of an Baldwin and the Red Cross met the true definition of compassion. American welfare state. They suffered with the fire victims and worked personally to reduce In The American Leadership Tradition: Moral Vision from their pain. Baldwin, the Red Cross and the fire victims themselves might Washington to Clinton, Marvin Olasky noted that when Cleveland was even have felt that aid from Washington, D.C., might dampen the mayor of Buffalo, N.Y., in the early 1880s, his “willingness to resist enthusiasm of the volunteers who gave their energy and resources out demands for government handouts made his name known throughout of a sense of duty and brotherly love. And this was in a year when the New York State,” catapulting him to the governorship in 1882 and the federal budget had a $100 million surplus, not the $400 billion deficit of presidency in 1884. today! Indeed, frequent warnings against using the government to redis- Government relief is in fact pre-emptive. There is little reason to tribute income were characteristic of Cleveland’s tenure. He regarded as believe that politicians are more compassionate or caring than the a “serious danger” the notion that government should dispense favors population that elects them. There is little reason to believe that and advantages to individuals or their businesses. This conviction led politicians who are not on the scenes of either poverty or disaster and him to veto a wagonload of bills—414 in his first term and 170 in his don’t know the families affected will be more knowledgeable about how second—far more than all the previous 21 presidents com-bined. “I best to help them than those who are present and personally know the ought to have a monument over me when I die,” he once said, “not for victims. There is even less reason to believe that politicians spend other anything I have ever done, but for the foolishness I have put a stop to.” people’s money more effectively than those people to whom it belongs In vetoing a bill in 1887 that would have appropriated $10,000 in in the first place. Instead, when government gets involved, there is good aid for Texas farmers struggling through a drought, Cleveland wrote: reason to believe that much of its effort simply displaces what private peolep and groups would do better and more cost-effectively if I can find no warrant for such an appropriation in the Constitution; gove rnment stayed home. and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public “Government Should Not Support the People” service or benefit. A prevalent tendency to disregard the limited All of which leads me to a few words about a president who mission of this power and duty should, I think, be steadfastly happens to be among my personal favorites: Grover Cleveland—our resisted, to the end that the lesson should be constantly enforced 22nd and 24th president (the only one to serve two nonconsecutive that, though the people support the Government, the Government terms), and the humble son of a Presbyterian minister. should not support the people. Cleveland said what he meant and meant what he said. He did not Cleveland went on to point out, “The friendliness and charity of our lust for political office, and he never felt he had to cut corners, equiv- countrymen can always be relied upon to relieve their fellow-citizens in ocate or connive in order to get elected. He was so forthright and plain- misfortune.” Americans proved him right. Those Texas farmers even- spoken that he makes Harry Truman seem indecisive by comparison. tually received in private aid more than 10 times what th e vetoed bill would have provided. This strong streak of honesty led him to the right policy conclusion again and again. H.L. Mencken, who was known for cutting politicians As a devoted Christian, Cleveland saw the notion of taking from down to size, even wrote a nice little essay on Cleveland titled “A Good some to give to others as a violation of the Eighth and Tenth Man in a Bad Trade.” Commandments, which warn against theft and envy. He noticed what 20th century welfare statists did not, namely, that there was a period

268 A Republic—If We Can Keep It Wisdom From 19th Century Presidents 269 after the word “steal” in the Eighth, with no added qualifications. It does In March 2005, an international commission called on wealthy not say, “Thou shalt not steal unless the other guy has more than you countries like the United States to dramatically in crease their foreign do, or unless a government representative does it for you, or unless you aid. Many of the governments of Europe are in full support. can’t find anyone who will give it to you freely, or unless you’re totally But what would American presidents of the 19th century have had to convinced you can spend it better than the guy to whom it belongs.” say about that? I can imagine Cleveland, Johnson, Pierce, Van Buren, Cleveland had been faithful to the Founders and to what he believed Jackson, Madison or Jefferson reacting in disbelief at the very were God’s commandments, common sense and historical experience. I suggestion. Cleveland might have said, “Aid to foreign countries? We can’t say the same for certain of his successors who, in more recent don’t even dispense aid to Americans.” And he would have had a times, cast wisdom to the winds and set America on a very different century of unprecedented progress against poverty to point to as his course. example. For the benefit of welfare statists here and abroad, I think Cleveland “Slaves to the System” and the others I’ve spoken of today would be very comfortable echoing the sentiments of the 19th century French economist and statesman For the first 150 years of American history, government at all levels Frederic Bastiat: played little role in social welfare. In a 1995 Heritage Foundation And now that the legislators and do-gooders have so futilely document titled “America’s Failed $5.4 Trillion War on Poverty,” Robert inflicted so many systems upon society, may they finally end where Rector and William Lauber point out, “As late as 1929, before the onset they should have begun: May they reject all systems, and try liberty; of the Great Depression, federal, state, and local welfare expenditures for liberty is an acknowledgment of faith in God and His works. were only $90 million.” In inflation-adjusted dollars, that would be under $1 billion today. By 1939, welfare spending was almost 50 times —LWR, April 2005 that amount, but at least the politicians of the day thought of it as a temporary bridge for its recipients. Welfare spending then fell and wouldn’t return to the 1939 levels until Lynd on Johnso n ’s “War on Poverty” in the mid-1960s. Note: The above was first delivered as a speech at the inaugural And now we know, after $5.4 trillion and a series of catastrophic conference of the Center for Vision and Values on the campus of Mr. Reed's fiscal and social consequences, those old-fashioned virtues and undergraduate alma mater, Grove City College, in April 2005. principles generally embraced by America’s 19th century presidents were right on the mark. More than 100 years ago, the great intellectual and crusader for liberty Auberon Herbert offered a cogent observation from his native Britain. His remarks neatly summarize the views of the mne I’ve discussed here: No amount of state education will make a really intelligent nation; no amount of Poor Laws will place a nation above want; no amount of Factory Acts will make us better parents. . . . To have our wants sup-plied from without by a huge state machinery, to be regulated and inspected by great armies of officials, who are themselves slaves of the system which they administer, will in the long run teach us nothing, (and) will profit us nothing.

Chapter Forty-Five

The Silver Panic

“History is little more than the register of the crimes, follies, and misfortunes of mankind,” in the opinion of historian Edward Gibbon. While it may be argued that there are numerous triumphs in human affairs to write about, Gibbon’s observation seems to be true. If the typical history text were to be stripped of any mention of war, depression, famine, coercion, tragedy, genocide, scandal, rivalry, and mayhem, the remains could probably be reprinted in a leaflet. Strangely, the awesome Panic of 1893 seems to have escaped the careful scrutiny and exhaustive research of historians. Though it occurred only a little more than a century ago, it remains an obscure episode in American history. It signaled the beginning of a deep depression. Businesses collapsed by the thousands. Banks closed their doors in record numbers. Unemployment soared and idle millions roamed the streets and countryside seeking jobs or alms. And the country witnessed a spectacular display of political fireworks, now all but forgotten. For the believer in the free economy, the story of the Panic of 1893 offers a treasure chest of empirical support. The lessons of this tragedy 271 272 A Republic—If We Can Keep It The Silver Panic 273 add up to a compelling indictment of government’s ability to “manage” a the maladjustments of the Bank era had to be liquidated. In 1857 the nation’s money. economy had to retrench after a decade of credit expansion on behalf of Charles Albert Collman observed that “Money trouble was the state governments that had forced their obligations on the state manifest peculiarity of the long, drawn out Panic of ’93.”92 Indeed, a banking systems. In 1873 the post-Civil War readjustment finally break down of the monetary system and national bankruptcy were corrected the excesses of the government’s rampant greenback narrowly averted in that year. But money is that great invention which inflation. The back-ground of the 1893 debacle is equally interventionist permits the development of a modern e xch a n g e economy. How could and has some uniquely interesting features which give rise to the label, something so vital to commerce become so troublesome? “The Silver Panic.” Everyone knows that fingerprints are a great aid in placing a Gold and silver rose to prominence as the monies of the civilized suspect at the scene of a crime. The distinguishing characteristics of world through a process of free and natural selection in the each individual’s skin patterns make this possible. In the case of the marketplace of exchange. Both circulated as money, though gold was far Panic of 1893, the tragedy is smothered with the fingerprints of more valuable. The market ratio between the metals had been roughly politicians. “I deem it proper at the outset to state,” wrote Charles S. 15 to 1 (15 ounces of silver trading for 1 ounce of gold) for centuries. Smith in the October, 1893 North American Review, “that the recent Gold was preferred for large transactions and silver for small ones. The panic was not the result of over-trading, undue speculation or the free market had established “parallel standards” of gold and silver, each violation of business principles throughout the country. In my judgment freely fluctuating within a narrow range in relation to market supplies it is to be attributed to unwise legislation with respect to the silver and demands. Before long, though, government decided it would “help question; it will be known in history as ‘the Silver Panic,’ and will out” the market by interfering to “simplify” matters. The result was constitute a reproach and an accusation against the common sense, if another of the many well-intentioned blunders imposed on a populace not t he common honesty, of our legislators who are responsible for our by force of law: the official “fixing” of the gold/silver ratio. This became present monetary laws.”93 the policy of bimetallism. Under the direction of Alexander Hamilton, the federal government adopted an official ratio of 15 to 1 in 1792. If the market ratio had been Early Interventions the same and had stayed the same for as long as the fixed ratio was in Contrary to popular impression, government in America has never effect, then the fixed ratio would have been superfluous. But the market been totally aloof from the monetary scene. Article I, Section 8, of the ratio, like all market prices, changed over time as supply and demand Constitution grants Congress the power “to coin money, regulate the conitionsd changed. As these changes occurred, the fixed bimetallic value thereof, and of foreign coin, and fix the standard of weights and ratio became obsolete and “Gresham’s Law” came into operation. measures.” In the century preceding 1893, Congress experimented with two central banks, a national banking system, paper money issues, and fixed ratios of gold and silver. Gresham’s Law America’s first cyclical depression occurred in 1819, after three wild Gresham’s Law holds that bad money drives out good money when years of currency inflation caused by the Second Bank of the United government fixes the ratio between the two circulating monies. “Bad States. When that “money monster” was eliminated by hard money man money” refers to the money which is artificially over-valued by the Andrew Jackson, the economy slumped into depression again and all government’s ratio. “Good money” is the one which is artificially undervalued. Gresham’s Law began working soon after Hamilton fixed the ratio at 15 to 1, as the market ratio stood at, roughly, 15½ to 1. This 92 Charles Albert Collman, Our Mysterious Panics, 1830–1930 (New York: Greenwood meant that if one had an ounce of gold, one could get 15½ ounces of Press, 1968), p. 88. silver on the bullion market, but only 15 ounces for it at the 93 Charles S. Smith, "The Business Outlook," North American Review, October 1893, p. 386. government’s mint. Conversely, if one had 15 ounces of silver, one could

274 A Republic—If We Can Keep It The Silver Panic 275 get an ounce of gold at the mint but less than an ounce on the market. So spending, and that real prosperity comes only from individual effort silver flowed into the mint and was coined while gold disappeared, and thrift.94 went into hiding, or was shipped overseas. The country was thus put on The greenback inflation of the Civil War era left an indelible a de facto silver standard, even though it was the declared policy of the impression on many Americans. They were suspicious of plans to revive government to maintain both metals in circulation. a policy of deliberate paper money expansion on behalf of any special Congress in 1834 changed the ratio to 16 to 1, but the market ratio interest group. In 1875, Congress passed the Specie Resumption Act, had not changed much, and this time gold was over-valued and silver declaring it the policy of the government to redeem the Civil War under-valued. Gold flowed into the mint, silver disappeared, and the greenbacks at par in gold on January 1, 1879. It was regarded from this country found itself on a de facto gold standard. point on that in order to protect the redemption of the greenbacks, the With the end of the Civil War inflation, and subsequent Treasury would be obliged to maintain a minimum of $100,000,000 in readjustment in the depression of 1873, the story of the Panic of 1893 gold on reserve. The most that the inflationists got was a government begins to unfold. It opens with the inflationist agitation of the 1870s. pledge not to cancel the greenbacks once redeemed, but to reissue them so th at the total number outstanding would remain the same. In 1875, the newly-formed National Greenback Party called for currency inflation. The proposal attracted widespread support in the West and South where many farmers joined associations to lobby for Turning to Silver inflation. They demanded at first that the government balloon the paper The attention of the inflationists was then directed at another money supply in the belief that such a policy would guarantee medium: silver. Robert F. Hoxie, in the Journal of Political Economy in prosperity. It was a demand that finds a less shrill but no less potent 1893, wrote that the inflationists focused their demands on a silver voice among many economists today. An eloquent refutation of the idea inflation as a matter of expediency. “They had no love for silver as such,” that the printing press can create economic wealth can be found in the revealed Hoxie, “but it was the cheapest and most abundant substance words of Benjamin Bristow, President Grant’s Secretary of the Treasury. for which they could gain support, its use would result in more legal In his annual message of 1874, Bristow declared: tender c urrency, and its metallic character would in a measure shield The history of irredeemable paper currency repeats itself whenever the advocates from being stigmatized as inflationists.”95 and wherever it is used. It increases present prices, deludes the The inflationists now became “silverites” and their rallying cry laborer with the idea that he is getting higher wages, and brings a became “Free Silver at 16 to 1.” Their influence was sufficient to secure fictitious prosperity from which follow inflation of business and passage of the Bland-Allison Act in February, 1878—the first of the acts credit and excess of enterprise in ever-increasing ratio, until it is putting the government in the business of purchasing quantities of dis-covered that trade and commerce have become fatally diseased, silver for coinage. The Act provided for the purchase by the Treasury of when confidence is destroyed, and then comes the shock to credit, not less than two, nor more than four, million dollars’ worth of silver followed by disaster and depression, and a demand for relief by bullion per month, to be coined into dollars each containing 371¼ further issues. . . . The universal use of, and reliance on, such a cur- grains of pure silver (which coincided with the lawful ratio of 16 to 1, rency tends to blunt the moral sense and impair the natural self- since the gold dollar still contained 23.22 grains of pure gold). These dependence of the people, and trains them to the belief that the dollars were to be legal tender at their nominal value for all debts and Government must directly assist their individual fortunes and business, help them in their personal affairs, and enable them to discharge their debts by partial payment. This inconvertible paper currency begets the delusion that the remedy for private pecuniary 94 James A. Barnes, John G. Carlisle, Financial Statesman (New York: Dodd, Mead and Co., distress is in legislative measures, and makes the people unmindful 1931; reprint ed., Gloucester, Mass.: Peter Smith, 1967), pp. 32-33. of the fact that the true remedy is in greater production and less 95 Robert F. Hoxie, "The Silver Debate of 1890," Journal of Political Economy 1 (1892– 1893): 561.

276 A Republic—If We Can Keep It The Silver Panic 277 dues, public and private. Paper silver certificates were to be issued does much the same thing today when it subsidizes peanuts or wheat. upon deposit of the bulky silver dollars in the Treasury. The result of this politica l interferenceis a chronc i surplus of these The free silver forces were dissatisfied with Bland-Allison because it commodities. did not go far enough—it did not provide for the free and unlimited The silverites’ drive for favorable legislation culminated in the government purchase and coinage of silver at 16 to 1. The only silver to Sherman Silver Purchase Act of 1890, which replaced the Bland-Allison be coined would be the two to four million dollars’ worth that the Act. The Sherman Act stipulated that the Treasury had to purchase 4.5 government purchased each month, and the Treasury, while the law million ounces of silver per month, or roughly twice the amount the was on the books, rarely bought more than the minimum amount. Treasury had been purchasing under Bland-Allison. Payment was to be Silver producers in particular had a vested interest in the state of made in a new legal tender paper currency, the so-called Treasury notes affairs, for the market price of silver had begun a long-term decline in of 1890, redeemable in either gold or silver at the discretion of the the1870s. Securing a government pledge to buy silver at a higher price Treasury. The 4.5 million ounces of silver mandated by the law than could be obtained in the free market was an obviously lucrative represented almost the entire output of American silver mines. This arrangement. As the market ratio of silver to gold steadily rose above continuing subsidy to silver producers meant that the government was 16 to 1, the profit potential became enormous. engaged in a full-blown force-feeding of the American economy. It was only a matter of time before the patient would suffer the pangs of indigestion. Bland-Allison Passed Over President’s Veto Bland-Allison was passed over the veto of President Rutherford B. U.S. Out of Step Hayes. The president, in his veto message, noted that minting silver coins at the ratio of sixteen ounces of silver to one ounce of gold would The action of the United States government in 1878 and 1890 with drive gold out of circulation. The decline of the market price of silver respect to silver was especially peculiar in light of world monetary had raised the market ratio at the time of passage of the act to nearly events. Germany, immediately after the Franco-Prussian War in the 18¼ to 1. If the mint offered to pay one ounce of gold for just sixteen early 1870s, had withdrawn her silver from circulation and adopted a ounces of silver, then only silver would be minted and the country single gold standard. France, Belgium, Switzerland, Italy, and Greece would be on the road back to a de facto silver standard. In Hayes’ belief, followed by first restricting the coinage of silver and then eliminating it “A currency worth less than it purports to be worth will in the end altogether. Denmark, Norway, and Sweden adopted the single gold defraud not only creditors, but all who are engaged in legitimate standard, making silver subsidiary by 1875. In that year, the business, and none more surely than those who are dependent on their government of Holland closed its mints to the coinage of silver. A year later, the Russian government suspended the coinage of silver except daily labor for their daily bread.”96 for use in the Chinese trade. In 1879, Austria-Hungary ceased to coin When money is left to the free market, its supply is restricted by its silver for individuals, except for a special trade coin. This rapid scarcity and costs of production. Its value is thus preserved. The worldwide transition from silver to gold prompted the United States declining price of silver on the free market would have erased the Treasury Department in 1879 to note that “since the monetary profitability of many mines and hence would have prevented a drastic disturbance of 1873–78 not a mint of Europe has been open to the increase in silver currency. But when the government stepped in and coinage of silver for individuals.”97 Yet the United States government, at bought large quantities of silver bullion for coinage, and paid more for it a time when the value of silver was falling dramatically and when the in gold than was offered in the market, it forced the quantity of the nation’s trading partners were abandoning the white metal, stepped in white metal in circulation to exceed its true demand. The government to promote silver against gold at the unrealistic ratio of 16 to 1!

96 Herman E. Krooss, ed., Documentary History of Banking and Currency in the United States, vol. 2 (New York: Chelsea House Publishers, 1969), pp. 1921–1922. 97 Ibid., p. 1934.

278 A Republic—If We Can Keep It The Silver Panic 279

One way of looking at silver’s depreciation is to consider the annual The Flight of Capital average market value of the 371 ¼ grain silver dollar. In 1878, the The silver purchases noticeably affected the confidence of bullion value of that much silver was about 890; by 1890 it dropped to foreigners in the American economy. Many British and French investors 810; by 1893, it was worth 600; and by 1895 it plummeted to a mere expected devaluation of the dollar at the least, with complete financial 500. A climate of uncertainty pervaded the world of finance. As collapse predicted by some. Capital flowed out of the country as these Professor J. Laurence Laughlin wrote, “No one could know that foreigners sold American securities. Even Americans, in increasing contracts entered into when a dollar stood for 100 cents in gold might numbers after 1890, began exporting funds for investment in Canada, not be paid off in silver which stood for 50 cents on a dollar. That was Europe, and some of the Latin American countries, all of which seemed the predicament in which every investor found himself who had an stronger than the United States. obligation payable only in ‘coin’ and not in gold.” 98 The inflationary impact of the Bland-Allison and Sherman Acts was In an article entitled “Thou Shalt Not Steal,” Isaac L. Rice penned an particularly important in paving the way for panic and depression. A. D. eloquent repudiation of the government’s silver coinage policy. His Noyes, writing in Political Science Quarterly, stated that “The coinage of argument evoked the moral side of the question and eighty years later over-valued silver dollars since 1878, and the issue of Treasury notes is still a forceful indictment of monetary dishonesty: on silver bullion since 1890, have actually increased the country’s silver Of the various classes of crime that come under the category of theft and paper circulation, between 1879 and 1894, by seventy-five per none is more odious and despicable than the use of false weights cent.”101 and measures. Stamping a coin containing 3711/4 grains of silver as W. Jett Lauck, in his study entitled The Causes of the Panic of 1893, of the weight of one hundred cents, while in truth it is of the weight found that the Sherman Act inflation produced an “absence of the usual of fifty-three cents, is a falsification of weights morally not stringency in the New York money market” in the fall of 1891. Call loans distinguishable from stamping any other kind of weight as of two ranged from two to four per cent, a significant decline from earlier pounds which in truth is only of one pound. Only the methods by levels.102 which fraud is to be made are different. The thievish individual depends upon secret deceit, the qualities of the sneak thief; the In 1910 the National Monetary Commission requested 0. M. W. Sprague Government on coercion, the qualities of the highwayman.99 to report on the nation’s finances since the Civil War. In his authoritative report, History of Crises Under the National Banking In accordance with inexorable economic law, the Bland-Allison and System, Sprague found that from January, 1891 to June, 1893, “there Sherman Acts caused a drain of gold from the Treasury and an inflow of was an increase of $68,000,000 in the estimated amount of money in silver. This tampering with the fixity of the standard threatened the circulation.” The effect on bank credit was typical of any “easy money” Treasury’s declared policy of redeeming greenbacks and other policy: “During 1892 the low rates for loans were a clear indication that government obligations in gold. And, the disappearance of gold from the banks would have been glad to lend more than the demand of circulation and from the reserves of the nation’s banks threatened the borrowers made possible.” The classic symptoms of currency inflation sanctity of all contracts made in gold. Professor Laughlin observed that were evident, a situation which Sprague found to be unsustainable. He no producer “could feel so entirely sure of the standard of payments felt that “a situation which demands increasing credits to prevent that he could, without fear or hesitation, make his estimates a few years ahead.”100

98 J. Laurence Laughlin, The History of Bimeta llism in the United States, 4th ed. (New 101 A. D. Noyes, "The Banks and the Panic of 1893," Political Science Quarterly 9 (No. 1): York: D. Appleton and Co., 1900), p. 274. p. 15 99 Isaac L. Rice, "Thou Shalt Not Steal," Forum 22 (September 1896—February 1897): 1. 102 W. Jett Lauck, The Causes of the Panic of 1893 (Boston: Houghton, Mifflin and Co., 100 Laughlin, p. 269. 1907), p. 80.

280 A Republic—If We Can Keep It The Silver Panic 281 collapse is certain to arrive at that state in any case, and delay can compared to cash and bills receivable of little more than $100,000.”107 hardly be expected to improve matters.”103 The failure of the Philadelphia and Reading, a firm supported by powerful Wall Street financial houses, caused many businessmen to question the conditions of other railroads and the financial institutions End of the Boom behind them. The economy, drugged by easy money, was showing outward signs When President Harrison left office on March 4, 1893, the of prosperity. Unemployment, which had been above 5 per cent in 1890 Treasury’s gold reserve stood at the historic low of $100,982,410—an and 1891, fell to 3.7 per cent in 1892. Crop failures in Europe coupled eyelash above the $100 million minimum deemed necessary for with exceptional harvests here in the United States boosted agriculture. protecting the redemption of greenbacks. Merchants increasingly President Harrison told Congress, “There has never been a time in our refused to accept silver in violation of the law and ugly threats of strikes history when work was so abundant, or when wages were as high.”104 echoed in the nation’s factories. The boom was, however, only temporary. The twin evils of inflation and uncertainty as to the fixity of the standard were eating at the vitals of On April 22 the Treasury’s gold reserve fell below the $100 million the nation’s commerce. Late in January, 1893, prices of staples such as minimum for the first time since the resumption of specie payments in wheat and iron, previously on the rise, began to recede. Price declines 1879. Bankers and investors realized that the Treasury could not across the board foreshadowed a general cyclical contraction. “General indefinitely continue drawing upon the remaining gold reserve to business activity,” according to Charles Hoffman, “suffered a severe redeem the Treasury notes of 1890 in the attempt to maintain their check that was recognized at once in the business journals. The stock value. Banks had to brake their easy money habits and began calling in market gave ominous signs of falling prices before any sharp drop took their loans at a frantic pace. More and more investors began to fear that place.”105 Banks became apprehensive over the Treasury’s loss of gold before securities could be sold and realized upon, depreciated silver (as well as their own) and began to contract the pyramid of credit. would take the place of gold as the standard of payments. Loans declined almost 10 per cent from February to the beginning of By Wednesday, May 3, tension in the commercial community May. An article in the February, 1893 issue of Forum spoke of “a triggered a massive wave of selling on the stock market. The New York dangerous state of uneasiness in financial circles,” and warned that Times recorded the events the next day: “Fear is an element in monetary conditions which may be as serious in Not since 1884 had the stock market had such a break in prices as 106 its effects as reason.” occurred yesterday, and few days in its history were more exciting. A dramatic event took place on February 20. The Philadelphia and In the industrial shares particularly, there was a smashing of values Reading Railroad, a chronic invalid which nonetheless had paid its usual almost without precedent. In the last thirty minutes the brokers on bond dividend the month before, collapsed into bankruptcy. “When the the floor of the Exch ang e found the quot ations on the board of little end came,” writes Rendigs Fels, “it had a floating debt of $18.5 million use. Figures posted at one moment were valueless the next. In the industrials which were receiving the most punishment prices were 103 0. M. W. Sprague, History of Crises Under the National Banking System (Washington, dropping a point at a time. The crowds trading in them were made up of D.C.: Government Printing Office, 1910; reprint ed., New York: Augustus M. Kelley, 1968), p. 158. shouting men, who struggled about the floor like football players in a 108 104 Robert Sobel, Panic on Wall Street: A History of America’s Financial Disasters (New scrimmage. York: Macmillan Co., 1968), p. 243. 105 Charles Hoffman, The Depression of the Nineties: An Economic History, Contributions in Economics and Economic History, no. 2 (Westport, Conn.: Greenwood Press, 1 970 ), p. 107. 107 Rendigs Fels, American Business Cycles: 1865–1897 (Raleigh: University of North 106 Geo. Fred Williams, "Imminent Danger From the Silver Purchase Act," Forum 14 Carolina Press, 1959; reprint ed., Westport, Conn.: Greenwood Press, 1973), p. 185. (September 1892–February 1893): 789. 108 Industrials Were Hit Hard," New York Times, 4 May 1893, p. 1.

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The Panic of 1893 had begun! On May 4 a stock market favorite, policy. The Commercial and Financial Chronicle said as much on July 8, National Cordage Trust, went into receivership. Shortly before the 1893: panic, Cordage common stock had sold for $70 per share. The plunge The country is struggling with disturbed credit and the general was precipitous, as Charles Albert Collman vividly explains: derangement of commercial and financial affairs which a forced and In the Cordage Trust circle of the New York Stock Exchange, hats over-valued currency has developed. . . . Nothing but corrective leg- were being smashed, coats torn, cravats ruined. Here was an agony islation which shall remove the disturbing law, can afford any that meant financial life or death to many. Cordage common had measure of real relief.112 gone off 18 points. The preferred had lost 22. Suddenly howls went With the economy in depression, the necessity for eliminating the up from the floor. Those who could distinguish the wo rd s, heard the legislation which precipitated the tragedy became increasingly ominous cry: “Nineteen for Cordage!” apparent. On June 30, President Grover Cleveland called for a special The shares, a few moments later, went down to $12.109 session of Congress to repeal the Sherman Silver Purchase Act of 1890. “The present perilous condition,” he declared, “is largely the result of a financial policy which the Executive branch of the government finds The Cordage Crash embodied in unwise laws which must be executed until repealed by The Cordage crash was taken as, in Collman’s words, “some occult Congress.”113 The ensuing debate in the Congress was a splendid signal for the halting of enterprise.”110 Plants closed their gates and contest, pitting the forces of sound, honest money against the forces of went quickly into receivership. Unemployment rocketed to 9.6 per cent inflation, in which the sound money men calmly answered the question, before year-end, nearly three times the rate for 1892. In 1894, an “What would you put in place of the silver purchases?” with the single, estimated 16.7 per cent of industrial wage-earners were idle. solitary word, “Nothing!” From January to July, 1893, mercantile failures totaled a remarkable 3,401, with liabilities totaling $169,000,000. The bulk of the losses came Cockran Favors Repeal after the first week of May. Sprague revealed that the “failures exceeded both in number and in amount of liabilities those which had occurred in On August 26, Congressman Bourke Cockran of New York rose to deliver a memorable address in favor of repeal. The speech has been any other period of equal length in our history.”111 called the most eloquent and scholarly of the entire debate. The Bank failures and suspensions were the greatest on record. Most congressman advised his colleagues: occurred in the South and West, where the evils of a vicious currency expansion had taken root far more extensively than in the rest of the I think it safe to assert that every commercial crisis can be traced to country. an unnecessary inflation of the currency, or to an improvident expansion of credit. The operation of the Sherman Law has been to The economy was going through the pains of liquidation. The flood this country with paper money without providing any method malinvestments fostered by the Bland-Allison Act and Sherman Act whatever for its redemption. The circulating medium has become so inflation were being sloughed off. The threat to the de facto gold redundant that the chan nels o f commerce have overflowed and gold standard was a factor which no doubt complicated things, heightened has been expelled.114 uncertainty, determined the timing of the panic, and exacerbated the depression, but the chief responsibility for the crisis rested with the Cockran proceeded to trace the history of coinage in England and attempted force-feeding of the nation’s money supply by government explained how debasing the currency led to recurrent depressions.

109 Collman, p. 164. 112 Hoffman, p. 229. 110 Ibid, p. 165. 113 "Congress to Meet August 7," New York Times, 1 July 1893, p. 1. 111 Sprague, p. 169. 114 James McGurrin, Bourke Cockran (New York: Charles Scribner’s Sons, 1948), p. 135.

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James McGurrin, Cockran’s biographer, believes that the subsequent vote in the House of Representatives in favor of repeal “was due in no small measure to Bourke Cockran’s matchless eloquence and sagacious leadership.”115 The repeal bill passed the House on August 28 by a wide margin. 46 President Cleveland’s forceful leadership prompted the Senate to do likewise in October. The New York Times heralded the occasion: “The Treasury is released from this day from the necessity of purchasing a commodity it does not require, out of a money chest already depleted, and at the risk of dangerous encroachment upon the gold reserve.” 116 An indispensable pre-condition to recovery was accomplished with the repeal of the Sherman Silver Purchase Act. The derangement of the nation’s money was a big step closer to solution, though the road to recovery was long and hard. Not until 1897 did depression give way to revival and prosperity. Repeal of the Sherman Act was, by any measure, an act of congressional repentance. Indeed, it was an open admission that the Silver Panic was the offspring of a profligate, overbearing, and Chapter Forty-Six irresponsible government. Historian Ernest Ludlow Bogart summarized the lessons of the Panic of 1893: Public Money for Private Charity It must be said that the net results of this experiment of a “managed currency,” that is, one in which the government undertakes to provide the necessary money for the people, were disastrous. For the maintenance of a suitable supply the operation of normal When President Bush announced his controversial “faith-based economic forces is more reliable than the judgment of a legislative initiative” in 2001, it brought to mind something I learned years ago body. 117 from readings on ancient Roman history. —LWR, June 1978 After years of being shunned and even persecuted, Christians suddenly enjoyed the official blessing of the Roman state when Emperor Constantine came to power in 324 A.D. For the first time, imperial funds were used to subsidize priests and churches. Christians emerged from hiding in Rome’s catacombs to partake of the state’s largess. A faith that might have saved an empire was thus corrupted and in the end proved to be a futile safeguard against Rome’s ultimate destruction at the hands of barbarians a century and a half later. Indeed, before the barbarians arrived in 476, Emperor Julian launched a backlash against state-supported Christian influence in 361. He crippled the church by withdrawing the financial aid on which it had 115 Ibid, p. 138. become dependent, and even forbade Christians from teaching in the 116 "Need Buy No More Silver," New York Times, 2 November 1893, p. 1. schools. Because the Roman state was paying the Christian piper, it 117 Ernest Ludlow Bogart, Economic History of the American People (New York: eventually called most of the tunes. Longmans, Green and Co., 1937), p. 693. 285 286 A Republic—If We Can Keep It Public Money for Private Charity 287

For the sake of both their faith and Roman society at large, the Christians of the fourth century should have remained pure and Government Corrupts independent—advice expressed well 13 centuries later by the English poet John Dryden: “better shun the bait than struggle in the snare.” The real problem with the President’s initiative is the same as was manifested painfully in ancient Rome—government will be in a position President Bush is right to recognize the fruitful role of America’s to corrupt faith. The fact that the modern American state is relentlessly private, faith-based “armies of compassion.” For many reasons, such secular is one reason, but not the primary one. Resting as it does on the groups are far more effective in solving social problems—poverty, compulsory tax power, government funding of any kind, by its nature, is homelessness, illiteracy, to name a few—than are government at odds with the very thing that makes private faith-based programs programs and bureaucracies. They treat the whole person, which means work: impulses that are entirely voluntary and inner-motivated. they get to the root of problems that stem from spiritual, attitudinal, and behavioral deficiencies. They demand accountability, which means From start to finish, what private charities do is a manifestation of they don’t simply hand over a check every two weeks without expecting free will. No one is compelled to provide assistance. No one is coerced the needy to do much in return or to change destructive patterns of to pay for it. No one is required to accept it. All parties come together of behavior. And if they don’t produce results, they wither; the their own individual volition. And that’s the magic of it. The link parishioners or others who voluntarily support them will put their connecting the giver, the provider, and the receiver is strong precisely mites elsewhere. because each knows he can walk away at the slightest hint of insincerity, broken promises, or poor performance. Because each party When a government program fails to perform, its lobbyists make a is giving of his own time or resources voluntarily, he tends to focus on case for more money and they usually get it. Literally tens of thousands the mission at hand and doesn’t get bogged down or diverted by distant of faith-based organizations, large and small, that demonstrate every or secondary agendas, like filling out the proper paperwork or currying day in America what management expert Peter Drucker once said of favor with the political powers that be. nonprofit agencies in t he private sector: They “spend far less for results than governments spend for failure.” Most people of faith—whether they be Christian, Jew, Muslim, or something else—would ordinarily be the first to argue that God doesn’t In a single pithy question, John Fund of The Wall Street Journal need federal funds to do His work; just a change of heart will do, one underscored the instinctive, gut-level regard that Americans have for heart at a time. Sadly, there are more than a few people of faith who private aid, no matter what they may say in public: “If you had a have succumbed to temptation and are arguing that their organizations financial windfall and wanted to help the poor, would you even think now must take advantage of the Bush proposal or else precious lives about giving time or a check to the government?” Millions of Americans will not be turned around. That the mere offer of future funding is give to the Red Cross and the Salvation Army; almost nobody writes enough to turn some eyes to Washington that previously were aimed checks to the welfare department. somewhat higher suggests a subtle corruption of faith has already President Bush’s initiative would “pioneer a new model of cooper- begun. ation,” in part through federal contracts with faith-based groups to The administration argues that it will scrupulously avoid any direct provide a wide range of social services. The problem with it is not, as support of actual religious activities. It will fund the bed a homeless some critics argue, that it puts faith in a position to corrupt the govern- person sleeps in, not the Bible his Salvation Army mentor reads to him. ment. All the ingredients necessary for corruption in government are But as government and private funds flow into the same pot, it may be already there: vast sums of other people’s money and far more power very hard to follow what flows out of it and for what purpose, without a than any government should ever have. smothering paper burden to guarantee what the politicians call “accountability.”

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In Michigan, the Salvation Army accepts tax money to supplement the private donations it collects for taking care of the homeless. In 1995, the city of Detroit imposed a 25-page ordinance to make sure that shelters like those run by the Army are up to snuff. It requires, among other things, that all staffers be trained in resident complaint and 47 grievance procedures and that all meal menus be approved by a dietitian registered with the American Dietetic Association—“minor” diversions from the spi ritual mission of the Army, but all intended “for the public good,” to be sure. Advocates for the Bush proposal argue that this administration’s people in government will not burden faith-based charities with that kind of do-gooder bureaucratic rigmarole. But its people will not always be there. Those Romans who thought they had a friend in Constantine were undoubtedly more than a little upset with Julian. —LWR, August 2001

Chapter Forty-Seven

Equality, Markets, and Morality

The subject of “equality” is the source of much political debate. Ever since the founding era, free-market thinkers have argued for equality of opportunity in the economic order. Equality, in other words, is a framework, not a result. In modern terms the goal is a level playing field. Government is a referee that enforces property rights, laws, and contracts equally for all individuals. What the free-market view means in policy terms is no (or few) tariffs for business, no subsidies for farmers, and no racism written into law. Also, successful businessmen will not be subject to special taxes or the seizure of property. In America this view of equality is enshrined in the Declaration of Independence (“all men are created equal and are endowed by their creator with certain inalienable rights”) and the Constitution (“imposts and excises shall be uniform throughout the United States” and “equal protection of the laws”). Much of America’s first century as a nation was devoted to ending slavery, extending voting rights, and securing

289 290 A Republic—If We Can Keep It Equality, Markets, and Morality 291 property and inheritance rights for women— fulfilling the Founders’ they could. Illinois played this game well and secured over $55 million, goal of equal opportunity for all citizens. more than New York, California, and Texas combined. Progressives and modern critics of equality of opportunity have Massachusetts, with almost as many people as Illinois, received zero launched two significant criticisms against the Founders’ view. First, federal money. Massachusetts had much poverty and distress, but that equality of opportunity is impossible to achieve. Second, to the Governor Joseph Ely believed states should try to supply their own extent that equality of opportunity has been tried, it has resulted in a needs and not rush to Washington to gain funds at someone else’s gigantic inequality of outcomes. Equality of outcome, in the Progressive expense. Ely therefore promoted a variety of fundraising events view, is desirable and can only be achieved by massive government throughout his state to help those in need. “Whatever the justification intervention. Let’s study both of these objections. for [federal] relief,” Ely noted, “the fact remains that the way in which it To some extent, of course, the Progressives have a valid point— has been used makes it the greatest political asset on the practical side equality of opportunity is, at an individual level (as opposed to an of party politics ever held by any administration.” institutional level) hard to achieve. We are all born with different family In 1935 President Franklin Roosevelt confirmed Ely’s beliefs by advantages (or disadvantages), with different abilities, and in different turning the Works Progress Administration (WPA), which he had neighborhoods with varying levels of opportunity. As socialist established, into a gigantic political machine to transfer money to key playwright George Bernard Shaw said on the subject, “Give your son a states and congressional districts to secure votes. Roosevelt and his fountain pen and a ream of paper and tell him that he now has an equal cohorts used the rhetoric of removing inequalities as a political cover to opportunity with me of writing plays and see what he says to you.” gain power. Reporter Thomas Stokes won a Pulitzer Prize for his What the Progressives miss is that their cure is worse than the investigative research that exposed the WPA for using federal funds to illness. Any attempt to correct imbalances in family, ability, and buy votes. neighborhood will produce other inequalities that may be worse than The use of tax dollars, then, to mitigate inequality failed because— the original ones. Thomas Sowell writes, “[A]ttempts to equalize whatever the good intentions—the funds quickly became politicized. economic results lead to greater—and more dangerous—inequality in Presidential (and congressional) authority to tax and to transfer political power.” Or, as Milton Friedman concluded, “A society that puts funds from one group to another also proved to be a dangerous equality—in the sense of equality of outcome—ahead of freedom will centralization of power. Taxation increased both in size and complexity. end up with neither equality nor freedom. The use of force to achieve The IRS thus became a weapon a president could use against those who equality will destroy freedom, and the force, introduced for good resisted him. “My father,” Elliott Roosevelt observed of his famous purposes, will end up in the hands of people who use it to promote their parent, “may ha v e been the originator of the co ncept of emp lo y ing the own interests.” IRS as a weapon of political retribution.” Sowell and Friedman indeed recognized that efforts to remove Failure During the New Deal inequalities would create new inequalities, perhaps just as severe, and Sowell’s and Friedman’s point is illuminated by the failed efforts of would also dangerously concentrate power in the hands of politicians the federal government to reduce inequalities during the New Deal. In and bureaucrats. But Sowell and Friedman have readily conceded that the early 1930s the United States had massive unemployment when markets are left free, the inequality of outcomes is not necessarily (sometimes over 20 percent). In 1932 President Herbert Hoover morally justified. In other words, some people—through luck or supported the nation’s first relief program: $300 million was inheritance—become incredibly rich and others, who may have worked distributed to states. This was not a transfer from richer states to harder and more diligently, end up barely earning a living. Rewards, as poorer states but a political grab by most state governors to secure all F. A. Hayek, among others, has noted, are “based only partly on achievements and partly on mere chance.” Societies are more prosperous

292 A Republic—If We Can Keep It under free markets, but individual success and failure can occur independently of ability and hard work. Part VII Progressive Claims in Light of History What the historical record does seem to demonstrate is that the richest men in American history have been creative entrepreneurs who have improved the lives of millions of Americans and have achieved remarkable upward mobility doing so. For example, the first American to be worth $10 million was John Jacob Astor, a German immigrant and a son of a butcher. Astor founded the largest fur company in the United States, transforming tastes and lowering costs in clothing for people all over the world. John D. Rockefeller, the first American to be worth $1 billion, was the son of an itinerant peddler. Yet Rockefeller, with little education or training, went into the business of refining oil and did it better than anyone in the world. As a result, he sold the affordable kerosene that lit Individuals Against up most homes in the w orld. ( H e had a 60 percent wo rld market share in the late 1800s.) Government Injustice Henry Ford, the son of a struggling farmer, was the second American billionaire. He used the cheap oil sold by Rockefeller and cheap steel that was introduced by immigrant Andrew Carnegie to make cars affordable for most American families. The most recent wealthiest men in the United States—Sam Walton and Bill Gates—both came from middle-class households and both added much value for most American consumers. Free markets may yield odd results and certainly unequal outcomes, but the greater opportunities and prosperity have made the tradeoff worthwhile for American society. —BWF, September 2008

Chapter Forty-Eight

The Inspiring Story of Thomas Clarkson: A Student’s Essay that Changed the World

As a former university professor, I’ve read thousands of students’ essays through the years—sometimes joyously, but just as often painfully. Occasionally, the process of researching and writing exerted a significant influence on a student’s future interests and behavior. But of all the student essays ever written, I doubt that any had as profound an effect on its author and on the world as one that was penned 220 years ago at the University of Cambridge. The university’s annual Latin essay contest was known throughout Britain, and the honor of winning it was highly prized. In 1785, the topic for the competition was prompted by a horrific human tragedy a few years before: Near the end of a long voyage from Britain to Africa to the West Indies, the captain of the British slave ship Zong had ordered his crew to throw 133 chained black Africans overboard to their deaths. He reckoned that by falsely claiming the ship had run out of fresh water, he could collect more for the “cargo” from the ship’s insurer than he could fetch at a slave auction in Jamaica.

295 296 A Republic—If We Can Keep It The Inspiring Story of Thomas Clarkson 297

No one in the Zong affair was prosecuted for murder. A London the traffic in human lives. At one point, falling to the ground in anguish, court ruled the matter a mere civil dispute between an insurance firm he determined that if what he had written in his essay were indeed true, and a client. As for the Africans, the judge declared their drowning was it led to only one conclusion: “It was time some person should see these “just as if horses were killed,” which, as horrendous as it sounds today, calamities to their end.” was a view not far removed from the conventional wisdom that The significance of those few minutes in time is summed up in a prevailed worldwide in 1785. splendid recent book by Adam Hochschild, Bury the Chains: Prophets Slavery, after all, was an ancient institution. Even with our freedoms and Rebels in the Fight to Free an Empire’s Slaves: today, the number of people who have walked the earth in bondage far If there is a single moment at which the antislavery movement outnumbers those who have enjoyed even a modest measure of liberty. became inevitable, it was the day in 1785 when Thomas Clarkson Indeed, perhaps the luckiest of the people taken captive and bound sat down by the side of the road at Wades Mill. . . . For his Bible- for a life at the end of a lash were those who succumbed aboard ship, conscious colleagues, it held echoes of Saul’s conversion on the road where mortality rates sometimes ran as high as 50 percent. Surviving to Damascus. For us today , it is a landmark on th e l ong, toruo t us the “Middle Passage” across the Atlantic from Africa was only the start path to the modern conception of universal human rights. of a hellish experience—endless a nd often excruciating toil, with death More than two centuries later, that very spot is marked by a at an early age. monument, not far from London. Moved by the fate of the Zong’s victims and the indifference of the Thus began Clarkson’s all-consuming focus on a moral ideal: No court, the university vice chancellor in charge of selecting the topic for man can rightfully lay claim, moral or otherwise, to owning another. the 1785 contest at Cambridge chose this question: Anne liceat invitos in Casting aside his plans for a career as a man of the cloth, he mounted servitutem dare?—Is it lawful to make slaves of others against their a bully pulpit and risked everything for the single cause of ending the will? evil of slavery. Enter Thomas Clarkson, a man who, with a handful of compatriots At first, he sought out and befriended the one group—the armed only with words, would clutch the public by the neck and not let Quakers—who had already embraced the issue. But the Quakers go until it consigned slavery to the moral ash heap of history. The poet were few in number and were written off by British society as an odd Samuel Taylor Coleridge would later call him a “moral steam engine” fringe element. Quaker men even refused to remove their hats for and “the Giant with one idea.” any man, including the king, because they believed it offended an Clarkson, born in Wisbech in 1760, was a 25-year-old Cambridge even higher authority. Clarkson knew that antislavery would have to student when he decided to try his luck in the essay contest. He hoped become a mainstream, fashionable educational effort if it were to to be a minister, and slavery was not a topic that had previously have any hope of success. interested him. Still, he plunged into his research with the vigor, On May 22, 1787, Clarkson brought together 12 men, including a meticulous care and mounting passion that would come to characterize few of the leading Quakers, at a London print shop to plot the course. nearly every day of his next 61 years. Drawing on the vivid testimony of Alexis de Tocqueville would later describe the results of that meeting those who had seen the unspeakable cruelty of the slave trade firsthand, as “extraordinary” and “absolutely without precedent” in the history Clarkson’s essay won first prize. of the world. This tiny group, which named itself the Society for the What Clarkson had learned wrenched him to his very core. Shortly Abolition of the African Slave Trade, was about to take on a firmly after claiming the prize, and while riding on horseback along a country established institution in which a great deal of money was made and road, his conscience gripped him. Slavery, he later wrote, “wholly on which considerable political power depended. engrossed” his thoughts. He could not complete the ride without frequent stops to dismount and walk, tortured by the awful visions of

298 A Republic—If We Can Keep It The Inspiring Story of Thomas Clarkson 299

Powered by an evangelical zeal, Clarkson’s committee would energy and unremitting devotion to an ideal,” and that, “He inspired in become what might be described as the world’s first think tank. Noble his friends confidence in his ability to lead them.” 118 ideas and unassailable facts would be its weapons. In a diary entry for Wednesday, June 27, 1787, Clarkson tells of the “Looking back today,” writes Hochschild, “what is more astonishing moment he arrived in the slave ship port of Bristol. Genuine misgivings than the pervasiveness of slavery in the late 1700s is how swiftly it about his work gave way to a steely determination that served him well died. By the end of the following century, slavery was, at least on paper, in the battles ahead: outlawed almost everywhere.” Thomas Clarkson was the prime I began now to tremble, for the first time, at the arduous task I had architect of “the first, pioneering wave of that campaign”—the undertaken, of attempting to subvert one of the branches of the antislavery movement in Britain, which Hochschild properly describes commerce of the great place which was then before me. I began to as “one of the most ambitious and brilliantly organized citizens’ think of the host of people I should have to encounter in it. I movements of all time.” anticipated much persecution in it also; and I questioned whether I The credit for ending slavery in the British Empire is most often should even get out of it alive. But in journeying on, I became more given to William Wilberforce. He was the longtime parliamentarian who calm and composed. My spirits began to return. In these latter never gave in to overwhelming odds, introducing bill after bill to abolish moments I considered my first feelings as useful, inasmuch as they the trade in slaves, and later slavery itself. impressed upon me the necessity of extraordinary courage, and Wilberforce was a hero in his own right—but Thomas Clarkson was activity, and perseverance, and of watchfulness, also, over my own prominent among those who first proposed to Wilberforce that he be conduct, that I might not throw any stain upon the cause I had the movement’s man in Parliament. Moreover, it was the information undertaken. When, therefore, I entered the city, I entered it with an Clarkson gathered crisscrossing the British countryside—logging undaunted spirit, determining that no labour should make me 35,000 miles on horseback—that Wilberforce often used in shrink, nor danger, nor even persecution, deter me from my pursuit. parliamentary debate. Clarkson was the mobilizer, the energizer, the Clarkson translated his prize-winning essay from Latin into English fact-finder and the very conscience of the movement. and supervised its distribution by the tens of thousands. He helped In Thomas Clarkson: Friend of Slaves, biographer Earl Leslie Griggs organize boycotts of the West Indian rum and sugar produced with writes that this man on fire was “second to no one in indefatigable slave labor. He gave lectures and sermons. He wrote many articles and at least two books. He helped British seamen escape from the slave- carrying ships they were pressed into against their will. He filed murder 118 Another memorable and pivotal figure in this great movement was John Newton. charges in courts to draw attention to the actions of fiendish slave ship Newton is known today as the author of perhaps the most popular hymn in captains. He convinced witnesses to speak. He gathered testimony, Christendom, “Amazing Grace,” with its stirring first stanza: rustled up petition signatures by the thousands and smuggled evidence

Amazing grace, how sweet the sound, that saved a wretch like me; I once was lost, from under the very noses of his adversaries. His life was threatened but now am found, was blind but now I see. many times, and once, surrounded by an angry mob, he very nearly lost it. What is less well-known is that Newton’s lyrics were autobiographical. He had been a slave ship captain given to incessant cursing and stonyhearted treatment of his The long hours, the often thankless and seemingly fruitless forays to captives, but had undergone a spiritual awakening and penned the song that moves uncover evidence, the risks and the costs that came in every form, the congregations across the world to this day. many low points when it looked like the world was against him—all of Newton served the cause against slavery more immediately during this seminal that went on and on, year after year. None of it ever made the smallest period through an entreaty to William Wilberforce. Early in Wilberforce’s parliamentary career, before becoming involved in the antislavery effort, he had toyed with the notion dent in Thomas Clarkson’s iron will. of leaving government. John Newton convinced him to stay, advancing the view that God When Britain went to war with France in 1793, Clarkson and his intended Wilberforce to fulfill a great purpose. committee saw their early progress in winning converts evaporate. The

300 A Republic—If We Can Keep It The Inspiring Story of Thomas Clarkson 301 opposition in Parliament argued that abandoning the slave trade would true—courageous, visionary, disciplined, self-sacrificing—a man who only hand a lucrative business to a formidable enemy. And the public gave a long life almost entirely to the service of people he never met in saw winning the war as more important than freeing people of another lands he never saw.” color and another continent. An essay by a university student struck a spark, which lit a beacon, But Clarkson did not relent. He, Wilberforce and the committee kept which saved millions of lives and changed the world. If you ever hear spreading the message and looking for the best opportunities to anyone dismiss the power of the pen, just tell them the story of Thomas advance it. Clarkson, his prize-winning essay and the astounding events they It was at Clarkson’s instigation that a diagram of a slave ship brought forth for humanity. became a tool in the debate. Depicting hundreds of slaves crammed like —LWR, May 2005 sardines in horrible conditions, it proved to be pivotal in winning the public.

Clarkson’s committee also enlisted the help of famed pottery maker Josiah Wedgwood in producing a famous medallion with the image of a kneeling, chained black man, uttering the words, “Am I not a man and a brother?”

Indeed, Clarkson’s imprint was on almost everything the committee did. It even produced one of the first newsletters and, as Hochschild suggests, one of the first direct-mail campaigns for the purpose of raising money. The effort finally paid off. The tide of public opinion swung firmly to the abolitionists. The trade in slaves was outlawed by act of Parliament when it approved one of Wilberforce’s bills in 1807, some 20 years after Clarkson formed his committee. Twenty-six more years of laborious effort by Clarkson, Wilberforce and others were required before Britain passed legislation in 1833 to free all slaves within its realm. The law took effect in 1834, 49 years after Clarkson’s epiphany on a country road. It became a model for peaceful emancipation everywhere. Wilberforce died shortly afterwards, but his friend devoted much of the next 13 years to the movement to end the scourge of slavery and improve the lot of former slaves worldwide. Clarkson died at the age of 86, in 1846. He had been the last living member of the committee he had gathered at the London print shop back in 1787. Hochschild tells us that the throngs of mourners “included many Quakers, and the men among them made an almost unprecedented departure from sacred custom” by removing their hats. In Thomas Clarkson: A Biography, Ellen Gibson Wilson summed up her subject well when she wrote of this man from the little village of Wisbech, “Thomas Clarkson (1760–1846) was almost too good to be

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49 Afterword Two years after the publication in 2005 of the first edition of this essay, a remarkable motion picture was released worldwide. ‘Amazing Grace,’ starring Ioan Gruffudd as William Wilberforce and Rufus Sewell as Thomas Clarkson, is a historically faithful, must-see movie for the entire family.

Chapter Forty-Nine

The Liberty Tradition Among Black Americans Sources and Recommended Readings Bury the Chains: Prophets and Rebels in the Fight to Free an Empire’s Slavery and free institutions can never live peaceably together,” Slaves, By Adam Hochschild, Boston: Houghton Mifflin Company, 2005 Frederick Do u glass observed. “Liberty . . . must either overthrow slavery, or be itself overthrown by slavery.” Thomas Clarkson: Friend of Slaves, By Earl Leslie Griggs, Westport, Conn.: Negro Universities Press, 1970 Douglass, black America’s most renowned spokesman, made this argument during the Civil War. But what about after the war? Was it Thomas Clarkson: A Biography, By Ellen Gibson White, New York: St. proper for the government afterward to intervene and assist blacks in Martin’s Press, 1990 overcoming centuries of bondage? Many black leaders today promote Hero for Humanity: A Biography of William Wilberforce, By Kevin affirmative action, which gives racial preferences in hiring to black Belmonte, Colorado S p rings, Colo.: NavPress, 2002 Americans. But that was not the thinking of Douglass and other black The Slave Trade, By Hugh Thomas, New York: Simon & Schuster, leaders, such as Booker T. Washington, after the Civil War. 1997 Douglass, for example, in a major speech given in April 1865, expressed a desire for liberty alone. When the war ended, some whites and blacks wanted freed slaves to have special land grants or extensive federal aid. Douglass, a former slave himself, favored the later Civil Rights Bill of 1875, but shunned special privileges. “Everybody has asked the question . . . , ‘What shall we do with the Negro?’ I have had but one answer from the beginning. Do nothing with us!”

303 304 A Republic—If We Can Keep It The Liberty Tradition Among Black Americans 305

Douglass used the metaphor of an apple tree to drive his point a thing so thoroughly that no one can improve upon what it has done; home. “If the apples will not remain on the tree of their own strength, . . learns to make its services of indispensable value.” . let them fall! . . . And if the Negro cannot stand on his own legs, let him What about discrimination—say, when a white employer uses his fall also. All I ask is, give him a chance to stand on his own legs! Let him freedom to refuse to hire a black or to force him into segregated alone! . . .[Y]our interference is doing him a positive injury.” facilities? In such cases Washington sometimes argued for direct action. Finally, Douglass concluded, “If the Negro cannot live by the line of In 1894 he endorsed the blacks who boycotted newly segregated eternal justice, . . . the fault will not be yours. . . . If you will only untie his streetcars in Atlanta. In 1899 and 1900 he publicly opposed efforts by hands, and give him a chance, I think he will live.” the states of Georgia and Louisiana to disfranchise blacks. Washington Douglass knew much about rising and falling on his own merits. A insisted, “I do not favor the Negro’s giving up anything which is fugitive slave, he fled northward and joined the antislavery movement fundamental and which has been guaranteed to him by the in Massachusetts in 1841. He wrote an autobiography and edited the Constitution.” North Star, a newspaper promoting freedom for all blacks. Douglass was More often than not, however, Washington thought that trying to tall with a mass of hair, penetrating eyes, and a firm chin. Stubborn and use the force of government to advance the black cause was not as principled, he was a captivating orator and spoke all over the United effective as improving the race over time and making blacks States before and after the Civil War. He was even appointed U.S. indispensable to the American economy. He observed, “No man who minister to Haiti in 1889. continues to add something to the material, intellectual, and moral well- Douglass was especially comfortable speaking before audiences being of the place in which he lives is long left without proper reward. committed to freedom of opportunity for blacks. Not surprisingly, This is a great human law which cannot be permanently nullified.” Put therefore, he came to Michigan in the middle of the Civil War to speak at another way, Washington declared, “An inch of progress is worth more Hillsdale College, founded in 1844 as only the second integrated college than a yard of complaint.” in the nation. The college was somewhat depleted because most of the Thus when white racists used their freedom to discriminate against male students had enlisted in the Union army, which would ultimately blacks, blacks needed to use their freedom to build factories, invent win the war and secure the freedom that Douglass had been promoting products, and grow crops to make themselves indispensable to for over 20 years. economic progress in America. To Washington, that meant two courses When Douglass died in 1895, Booker T. Washington, founder of the of action. Tuskegee Institute in Alabama, became the most prominent spokesman for black Americans. Like Douglass, Washington was born into slavery, National Negro Business League and also like Douglass, he became a forceful writer and orator. In fact, Washington reseachedr and pblishedau biography of D ouglss a to First, he founded the National Negro Business League to bring promote their mutual ideas. together hundreds of black businessmen and inventors to share ideas and promote economic development. After some initial reluctance, For example, Washington shared Douglass’s belief that equal Washington even used this forum to champion black businesswomen, opportunity, not special privileges, was the recipe for success for blacks. such as hai r- care entreprneure Mad am C. J . Walker, th e fir st black Two years after Douglass’s death, Washington also made the pilgrimage female millionaire. to Hillsdale College and spoke to the students about promoting in the black community “efficiency and ability, especially in practical living.” Second, Washington promoted more education for blacks. Education to Washington, especially industrial education that stressed He elaborated on this idea in his 1901 book Up From Slavery. “I manual labor as well as literary skill, was the means to producing future believe,” Washington insisted, “that my race will succeed in proportion entrepreneurs, inventors, and teachers that would expand the as it learns to do a common thing in an uncommon manner; learns to do foundation of black achievement and make racial progress inevitable.

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Tuskegee Institute was Washington’s main focus, but he encouraged the various black schools and colleges that sprang up all around the nation. While only one black college existed before the Civil War, an average of more than one each year was created in the decades after the war. 50 What was the result of the emphasis on liberty, self-help, and education stressed by Douglass and Washington? Some black leaders, such as W. E. B. DuBois, criticized the slow and uneven progress, but in truth, black advancement was visible and compelling. Black literacy rates (age 10 and over) went from 20 percent in 1870 to 84 percent by 1930. That meant that in 1930—in sharp contrast to 1870—any honestly administered literacy test for voting would disfranchise almost as many whites as blacks. During these 60 years black inventors came forth with dozens of major inventions: lubricating systems for train engines, ventilator screens to protect passengers on those trains, the traffic light, and hundreds of uses for the lowly peanut. Chapter Fifty These advances slowly helped break down the stereotypes of blacks as illiterate and unskilled. Some of the evidence for change in attitude The Costs of Segregation to the Detroit Tigers was symbolic. For example, Booker T. Washington, who had been the first black invited to the White House, became the first black to be honored on an American coin in 1946. The next year major league Many people know the remarkable and inspiring story of Jackie baseball was integrated; 12 years later all major league teams were Robinson and how he endured racial insults to integrate major league integrated, and it was accomplished Booker T. Washington-style, baseball in 1947. In Robinson’s first year alone he won the rookie-of- without government interference or mandates. the-year award and led his Brooklyn Dodgers to the National League pennant. As black Americans increasingly showed themselves to be educated and contributing parts of the American economy, racist arguments But Robinson was only part of the integration story. What about broke down and public support for integration and voting rights began those teams that refused to hire blacks, that insisted on following racist to increase. Change was not always steady or peaceful, but it did come. policies? What made them finally decide to integrate? Douglass and Washington were its forerunners. Douglass said it best To answer these questions, it is useful to focus on the Detroit Tigers. 140 years ago: “All I ask is, give him [the black American] a chance to While other major league teams were signing Satchel Paige, Willie Mays, stand on his own legs.” Hank Aaron, and other black stars, the Detroit Tigers, under owner —BWF, May 2005 Walter Briggs, refused to hire any blacks. Wendell Smith, a black athlete and sportswriter, called Briggs “very prejudiced. He’s the major league combination of Simon Legree and Adolf Hitler.” Smith was no doubt exaggerating. However, the Tigers were indeed the next-to-last team in the major leagues to integrate (in 1958)—and only did so after Briggs had died.

307 308 A Republic—If We Can Keep It The Costs of Segregation to the Detroit Tigers 309

Let’s look at the results of Detroit’s decision to avoid hiring blacks. 1960s. They signed Willie Horton, a power-hitting outfielder, and Earl Before baseball integrated, Detroit was a top team in the major leagues. Wilson, a veteran pitcher who won 22 games in his first season as a Led by ace pitcher Hal Newhouser and sluggers Hank Greenberg and Tiger. In 1968 Wilson, along with Denny McLain, was a mainstay of the Rudy York, the Tigers won the American League pennant in 1945. Tiger pitching staff. Horton hit 36 home runs and was fourth in the During each of the next two years, they finished in second place, clearly league in batting average. The Tigers that year, after a long drought, among the best teams in baseball. went on to win the pennant and the World Series. The next year, 1948, the Cleveland Indians signed two outstanding black players: Larry Doby, a power-hitting outfielder, and Satchel Paige, Lessons Learned possibly the greatest pitcher of his generation. The result was that Indians won the pennant by one game, and then, with seven key hits What lessons can we learn from Detroit’s experience with segrega- from Doby, they won the World Series. What’s more, Cleveland set a tion? First, as baseball expert Steve Sailer has noted, “competitive major league record for attendance—2.7 million fans bou g ht tickets to markets make irrational bigotry expensive—not impossible, but costly.” watch the integrated team play. In the 1950s Detroit could continue to field segregated teams, but only at a price. Joseph Bibb, a black sportswriter, said it well: “The white man The examples of Brooklyn and Cleveland gave the other teams wants money and color pays off.” something to ponder. They could continue to ignore black talent, but there would be a cost: fewer wins and fewer fans. The Boston Red Sox learned this lesson the hard way, too. In 1959, one year after Detroit, Boston became the last team in major league The Detroit Tigers learned this lesson the hard way. In 1948 the baseball to integrate. The Red Sox, like the Tigers, paid their price for Tigers dropped from second to fifth place in the American League—and segregation in the won-lost column. More specifically, in 1946, Boston during the next ten years they would finish among the top three teams won the American League pennant (with Detroit finishing second). only once. In 1952 they wound up in last place in the American League, From 1947 to 1951, with integration still slow, Boston never finished winning only 50 games and losing 104. No batter on the team hit higher lower than third place in the American League. But they never finished than .284. higher than third place from 1952 to 1959, the year they finally From 1945 to 1952, the Tigers had plunged from world champions integrated. During those bleak years, Boston manager Pinky Higgins, a to cellar dwellers, yet Walter Briggs still refused to sign a black player native of Red Oak, Texas, insisted, “There’ll be no niggers on this ball or develop any blacks in Detroit’s minor-league system. The Tigers did club as long as I have anything to say about it.” No pennants either. bring up Al Kaline and Harvey Kuenn, two excellent white players, who Boston’s superstar Ted Williams was the greatest hitter in baseball both won batting titles in the 1950s. But their talents were wasted during the 1950s, but without roles for black players his Red Sox without a quality supporting cast that included talented blacks. languished during that decade. With Detroit in a tailspin, Walter Briggs died and the Briggs family There is an economics lesson to learn here, too. The integration of sold the Tigers in 1956 to Fred Knorr, a Michigan man who was very baseball was a triumph of the free market. No government mandate different from Briggs. During the 1930s, while Briggs was enjoying forced Branch Rickey, the Dodgers’ general manager, to sign Jackie segregated baseball in Detroit, Knorr was 100 miles west, graduating Robinson. Self-interest, in the form of economic gain, was the key to from Hillsdale College, the second oldest campus in the United States to integrating not just one team, but, within 12 years, all teams in the have an integrated student body. Knorr believed in integration on major leagues. Quotas and affirmative action were unnecessary and principle and soon helped contribute $75,000 to develop 17 black would have been counterproductive. When the baseball commissioner players in Detroit’s minor-league system. finally allowed open competition, some owners quickly wanted to hire Knorr was killed in an accident in 1960, but his policy of integration black players—and soon after they did so, all teams voluntarily was paying off, and the Tigers made a splendid comeback during the followed suit. Nobody forced anyone to do anything he didn’t want to do.

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One final point is that free markets in baseball provided black heroes to all Americans during the 1940s and 1950s. Whites all over Brooklyn cheered mightily for Jackie Robinson to clobber white pitchers, and for his black teammate, Don Newcombe, to strike out white hitters. After winning the 1948 World Series, Cleveland 51 teammates Larry Doby and Steve Gromek, one black and the other white, were photographed in a spontaneous embrace. Racial barriers receded and sports became the entering wedge that helped make the revolution in race relations possible. —BWF, December 2003

Chapter Fifty-One

Elijah McCoy and Berry Gordy: Ingenuity Overcomes

Part of the tragedy of affirmative action is its implied premise that intended beneficiaries can’t succeed in business unless government grants them special privileges. But history shows that when people have the freedom to succeed, remarkable entrepreneurs and innovators emerge. Two examples separated by a century—Elijah McCoy and Berry Gordy—show how black innovators changed American life before the existence of affirmative action. Railroads were one of the greatest inventions of the nineteenth century. One man who was indispensable in helping the railroads run efficiently and on time was Elijah McCoy. He was born in 1843 in Canada, where his parents had fled from Kentucky to escape slavery. In Canada, the McCoys learned that individual freedom and training in the marketplace were keys to opening opportunities for blacks. On reaching manhood, Elijah McCoy went to Scotland for training in mechanical engineering. When it came time to apply his industrial skills, the Civil War had ended and blacks were legally free. McCoy came back

311 312 A Republic—If We Can Keep It Elijah McCoy and Berry Gordy: Ingenuity Overcomes 313 to th e United States and settled in Ypsilanti, Michigan, where he began The Motown Sound working for the Michigan Central Railroad. Forty years ago, many blacks enjoyed rhythm and blues music, but it was routinely unprofitable and often performed in shabby venues. Determined to Achieve Berry Gordy, a songwriter and assembly-line worker, had a vision of taking black-inspired music out of the slums and giving it broad, Despite his training, McCoy was offered the lowly job of locomotive national appeal as a respectable art form. In 1959, Gordy borrowed fireman. He accepted it with a determination to show the railroad that $800 from his family and risked it to start Motown Record Corporation, he could accomplish more. named for the “motor town” of Detroit. He immediately applied his skills to a major problem: the dangerous Once in business, Gordy hustled musical talent from the streets of overheating of locomotives. Trains had to stop regularly so that their the city and pinched pennies to survive. He set up a used two-track engines could be oiled to reduce friction. If trains stopped infrequently, recorder in his small house at 2648 West Grand Boulevard that became the overheating could damage parts or start fires. If they stopped too Motown headquarters. His father did the plastering and repairs, and his often, freight and passengers would be delayed. McCoy invented a sister did the bookkeeping. His vocal studio was in the hallway, and his lubricating cup that oiled engine parts as the train was moving. He echo chamber was the downstairs bathroom. “We had to post a guard secured a patent for it in 1872 and steadily improved it. outside the door,” Gordy says, “to make sure no one flushed the toilet Others tried to imitate McCoy’s invention, but he kept ahead of them while we were recording.” with his superior engineering skills. His standard of quality was so high The fact that Gordy started Motown out of his home is more than a that the cup became known as “the real McCoy,” which many believe to quaint historical footnote. Doing that today in Detroit’s residential areas be the origin of the famous phrase. would violate the city’s repressive ban on home-based businesses—a The invention helped the Michigan Central run safer and quicker sad comment on how stifling Detroit’s regulations and taxes have across the state. It was also put to use in stationary engines and even in become since the 1950s. steamship engines. The grateful management of the Michigan Central Gordy’s success is sometimes ascribed to his knack for writing and promoted McCoy and honored him as a teacher and innovator for the producing hit songs. But there was more than that. As actor Sidney railroad. Poitier observed, “Berry Gordy . . . set out to make music for all people, McCoy showed remarkable creative energy during the next 50 whatever their color or place of origin.” In doing so, Gordy made black years. He received 51 more patents, mostly for lubricating devices. Not music—the Motown sound—part of the mainstream popular culture in even old age dimmed his creative light. When he was 77, he patented an America. improved airbrake lubricator; when he was 80, he patented a vehicle What an achievement! Gordy had white teens all over America wheel tire. He founded the Elijah McCoy Manufacturing Company in humming the catchy tunes of the Four Tops, the Miracles, and the Detroit in 1920 to make and sell his inventions. Temptations. After that he promoted a flurry of black stars including Elijah McCoy was one of many black Americans who after the Civil Diana Ross, Michael Jackson, and Stevie Wonder. Gordy so much wanted War improved the American workplace and showed skeptical whites their music, and that of other Motown singers, to reach the larger white what free, enterprising blacks could accomplish. In the late 1950s, 30 audience in America that the sign on his headquarters read, “Hitsville, years after his death, another black American from Detroit, Berry U.S.A.” Gordy, was using the free market to transform American music. The impact of Gordy’s remarkable achievement is worth pondering. At one level, he created more opportunities for blacks everywhere in the music business—production, nightclubs, recording, and marketing.

Beyond that, in an era of racial tensions, Gordy’s music bonded blacks

314 A Republic—If We Can Keep It and whites. In 1964 and 1965, some whites attacked blacks in Oxford, Mississippi, and Selma, Alabama. But during this time, many white fans everywhere were making number-one hits for Gordy out of the first three songs by the Supremes: “Where Did Our Love Go?,” “Baby Love,” and “Come See About Me.” 52 The Motown sound became mainstream American music not by law or force, but by choice. It was clever entrepreneurship, not affirmative action, that persuaded whites to integrate black musicians into their record collections. Gordy used well-crafted songs to capture not just first place on Billboard‘s Top 100, but the number two and three slots as well for the whole last month of 1968. America’s system of private enterprise gave Gordy the chance to air his records on radio stations and have them compete for sales in record stores all over America. But when Gordy tried to expand the Motown sound into England, he found government standing in his way. The government stations, especially the British Broadcasting Company, refused to play Motown records and give Gordy the chance that private Chapter Fifty-Two enterprise gave him in the United States. “Because we couldn’t get our records on the government stations,” Gordy said, “our earliest airplay had come from Radio Veronica and Radio Caroline, ‘pirate ships’ The Difference One Can Make anchored a few miles off the coasts of England and Holland.” The Motown music broadcast from those pirate ships captivated The truest hero does not think of himself as one, never advertises British listeners. Soon the demand for Gordy’s records swamped record himself as such and does not perform the acts that make him a hero for stores from Liverpool to London and forced the bureaucrats to permit either fame or fortune. He does not wait for government to act if he the music to be heard on government stations. When Radio Free Europe senses an opportunity to fix a problem himself. On July 27, 2006 in the and The Voice of America began playing Gordy’s records, his empire quiet countryside of Maidenhead, England, we spent several hours with penetrated the Iron Curtain and truly became an international force. a true hero: Sir Nicholas Winton. His friends call him “Nicky.” Success, Gordy explains to this day, starts with a dream. “That’s In the fall of 1938, many Europeans were lulled into complacency by what’s wrong with people,” Gordy said when he started Motown. “They British Prime Minister Neville Chamberlain, who thought he had give up their dreams too soon. I’m never going to give up mine.” And pacified Adolf Hitler by handing him a large chunk of Czechoslovakia at because he didn’t give up, black Americans have m ore opportunities Munich in late September. Winston Churchill, who would succeed today and American music has changed forever. Chamberlain in 1940, was among the wise and prescient who believed otherwise. So was Nicholas Winton, th en a 29-year-old London Throughout much of American history, black entrepreneurs and stockbroker. innovators have been objects of discrimination. But, as the stories of Elijah McCoy and Berry Gordy suggest, the remedy for discrimination in Having made many business trips to Germany in previous years, the past is not reverse discrimination in the present, but the freedom to Winton was well aware of Jews being arrested, harassed and beaten. invent, create, and produce in a free market. The infamous Kristallnacht of November 9, 1938—in which Nazi thugs destroyed Jewish synagogues, homes and businesses while murdering —BWF, January 1999 scores of Jews across Germany—laid to rest any doubts about Hitler’s 315 316 A Republic—If We Can Keep It The Difference One Can Make 317 deadly intentions. His increasingly aggressive anti-Semitism and Winton’s advertisements to stir interest and highlight the urgent need Germany’s occupation of the Sudetenland in October 1938 spurred a for foster parents. When enough homes could be found for a group of tide of predominately Jewish refugees. Thousands fled to as-yet children, Winton submitted the necessary paperwork to the Home unoccupied Czechoslovakia, especially to Prague. Some had relatives Office. He assisted Chadwick in organizing the rail and ship and friends to move in with, but many settled into makeshift refugee transportation needed to get them to Britain. camps in appalling conditions in the midst of winter. Winton also took the lead in raising the funds to pay for the Winton had planned a year-end ski trip to Switzerland with a friend, operation. The expenses included the 50 British pounds the Home but was later convinced by him at the last moment to come to Prague Office required for each child (the equivalent of $3,500 per child in instead because he had “something urgent to show him”—namely, the today’s dollars) to cover any future costs of repatriation. Hopes that the refugee problem. Near Prague, Winton visited the freezing camps. What danger would p ass and the children could be returned evaporated as he saw aroused deep feelings of compassion within him: orphans and war clouds gathered in the spring and summer of 1939. children whose parents had already been arrested, and families Picture in your mind the unimaginable: the railway station in desperate to somehow get at least their children out of harm’s way. Prague when anguished parents and relatives loaded the children onto Jewish parents who were lifetime residents and citizens in the country the trains and said what would be for most, their final goodbyes. Boys were also anxious to send their children to safety, hoping in vain that and girls, many younger than five, peered out the windows of the the storm would blow over. They, like Winton, sensed that the Nazis steaming trains wondering about their uncertain future. No one knew if wouldn’t rest until they took the rest of the country, and perhaps all of they would ever be reunited with their families again. Europe as well. The thought of what could happen to them if the Nazis devoured the rest of Czechoslovakia was enough to inspire this good The first 20 of “Winton’s children” left Prague on March 14, 1939. man into action. Hitler’s troops overran all of Czechoslovakia the very next day, but the volunteers kept working, sometimes forging documents to slip the It would have been easy to assume there was nothing a lone children past the Germans. By the time World War II broke out on foreigner could do to assist so many trapped families. Winton could September 1, the rescue effort had transported 669 children out of the have ignored the situation and resumed his vacation in Switzerland, country in eight separate groups by rail. A ninth batch of 250 more stepping back into the comfortable life he left behind. Surely, most other children would have been the largest of all, but war prompted the Nazis people in his shoes would have walked away. Despite the talk of “peace to stop all departures. Sadly, none of those children lived to see the in our time,” Winton knew the clock was ticking. If any help could be Allied victory less than six years later. Pitifully few of the parents did mustered, it needed to come quickly. The next steps he took ultimately either. saved 669 children from death in Nazi concentration camps. Vera Gissing, one of the children Winton saved, and now in her late Getting all the children who sought safety to a country that would 70s, puts the rescue mission in perspective: “Of the 15,000 Czech Jewish accept them seemed an impossible challenge. Back in London, he wrote children taken to the camps, only a handful survived. Winton had saved to governments around the world, pleading for an open door, only to be a major part of my generation of Czech Jews.” rejected by every one (including the United States) but two: Sweden and Great Britain. He assembled a small group of volunteers to assist Vera’s story is an especially poignant one. She was 10 years old with the effort. Even his mother pitched in. when she left Prague on the fifth train on June 30, 1939. Two of her cousins were on the ninth train that never made it to freedom. Her The London team’s counterpart in Prague was a Brit named Trevor mother died of typhus two days after liberation of the Bergen-Belsen Chadwick. He gathered information from parents who wanted their concentration camp to which she was sent. Her father was shot in a Nazi children out, then forwarded the details to Winton, who used every death march in December 1944. Vera has no doubt about her own fate possible channel in his search for foster homes. There were 5,000 had it not been for Nicholas Winton. children on his lists. At no charge, British newspapers published

318 A Republic—If We Can Keep It The Difference One Can Make 319

Why did he do it? It certainly was not for the plaudits it might bring knew, the children might have returned to their homeland (as indeed, him. Indeed, he never told anyone about his achievement for half a some did). “Wherever they were, I had good reason to assume they century. Not until 1988, when his wife stumbled across a musty box of were safe and cared for,” he said. Indeed, among their ranks in later life records and a scrapbook while cleaning their attic, did the public learn would be doctors, nurses, therapists, teachers, musicians, artists, of Winton’s story. The scrapbook, a memento put together by his writers, pilots, ministers, scientists, engineers, entrepreneurs and even volunteers when the operation shut down, was filled with documents a Member of the British Parliament. Today they and their children, and pictures of Czech children. For all those decades, the children and grandchildren and great-grandchildren number about 5,000. the families who took them in knew little more than the fact that some Recent interviews with many of the adult “Winton Children” reveal kind soul, some guardian angel, had saved their lives. not only a deep appreciation for the man whose initiative saved them, What compelled this man to take on a challenge ignored by almost but also for living life to its fullest. Many express a lifelong desire to help everyone else? We sat down with Vera and Nicky at the latter’s home in others as a way of honoring the loved ones who made the painful choice late July to ask this very question. One would hardly guess that Nicky is to trust the young stockbroker from Britain. “We understand how 97; he looks and speaks with the vigor of someone years younger. He precious life is,” Vera told us. “We wanted to give something back to our greeted us heartily, escorting us through his living room and into the natural parents so their memory would live on.” backyard where he picked some fresh mulberries for us. He still tends Years after coming to Britain, Vera asked her foster father, “Why did to the gardens around his house. you choose me?” His reply sums up the spirit of the good people who This is a quiet man. In some ways he is a reminder of Aristotle’s gave homes to the 669: “I knew I could not save the world and I knew I magnanimous man (from his Nicomachean Ethics). Aristotle said the could not stop war from coming, but I knew I could save one human good-souled man is ashamed to receive benefits, and always repays soul.” more than he has received. “It is the characteristic of the magnanimous So humble is Nicky Winton that others have to tell him, over his own man to ask no favor but to be ready to do kindness to others,” he wrote objections, just what an uncommon man he is. Like the other “Winton in his Ethics. You hear no boasting from Nicky, no words designed to put Children” who have come to know him now, Vera reminds him any special focus on what he did. In a matter-of-fact fashion, he told us, frequently that she owes her very life to him. “Because it was the thing to do and I thought I could help.” One can’t help feeling drawn to a man for whom doing good for its own sake In our effort to add to the chorus of friends and admirers who want seems to come so naturally. Nicky Winton to understand just how we feel about him, we told him this: “You did not save only 669 children. Your story will elevate the In The Power of Good, a recent International Emmy Award-winning moral eloquence of lending a loving hand when lives are at stake. Some documentary from Czech producer Matej Minac, Nicky says he kept day, somewhere, perhaps another man or woman will confront a similar quiet about the rescue mission because “it was such a small part of my situation and will rise to the occasion because of your example. This is life.” Indeed, the operation spanned only eight months, while he was why the world must know what you did and why we think of you as a still working at the stock exchange, and it was prior to his marriage. hero even if you do not.” Still, to us, the e xplanation seemed inadequ ate. We pressed him on the point. In 1988, a television show seen across Britain, That’s Life, told the Winton story to a large audience and brought Nicky together with many “When the war started and the transports stopped, I immediately of his “children” for the first time since those horrific, fateful days of went into the RAF (Royal Air Force), where I stayed for the next five 1939. He is in regular correspondence with, and often visited by, many years. When peace came, what was a 35-year-old man to do, traverse of them—a source of joy and comfort since his wife Grete passed away the country looking for boys and girls?” At the end of the war, Nicky in 1999. Vera, who lives just a few miles from Nicky, sees him regularly. Winton was busy re-starting his own life. What he did to save so many She has co-authored a book which tells the full story, Nicholas Winton others just six years earlier was behind him, and over. For all that he and the Rescued Generation: Save One Life, Save the World.

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Governments have honored Nicky with awards and the recognition he never sought. In 1999 he was granted the Honorary Freedom of the Royal Borough of Windsor and Maidenhead for a lifetime dedicated to humanitarian activities. This award makes Nicky a member of a small Part VIII elite group, which includes Queen Elizabeth, the Duke of Edinburgh and Prince Charles. The Queen has conferred a knighthood upon him.

President George W. Bush wrote him earlier this year, expressing gratitude for his “courage and compassion.” The documentary, The Power of Good, is slowly spreading the Winton story around the world, as are an earlier, superb dramatization called All My Loved Ones and, of course, Vera’s book. The Big Government Warfare In a world wracked by violence and cruelty, Nicky Winton’s selfless actions nearly seven decades ago should give us all hope. Edmund State Burke once said, “All that is necessary for the triumph of evil is for good men to do nothing.” It’s more than a little comfort to know that in our midst are men and women like Nicky Winton whose essential decency can, and did, triumph over evil.

—LWR and Benjamin D. Stafford, August 2006

Authors’ postscript: Three weeks after meeting Nicky in England, we learned another remarkable fact about him that never came up during our visit. On his 94th birthday in May 2003, he became the oldest man to fly in an ultralight aircraft (known in the U.K. as a “microlight”). He did it to raise money for one of his favorite charities, Abbeyfield Houses for the aged. His pilot in the two-seater was Judy Leden, a world champion microlight flyer and daughter of one of the children Nicky saved in 1939.

Chapter Fifty-Three

James Madison: The Constitutional War President

Is it possible for a president to run a war effectively and obey the Constitution at the same time? Most historians would say no; after all, they persistently rank Abraham Lincoln and Franklin Roosevelt as two of the nation’s greatest presidents. Lincoln and Roosevelt, as war presidents, centralized power, restricted liberty, and suspended key parts of the Constitution during their stints in office. Historians like men of action, especially when these actions seemingly help win wars. However, James Madison, the first war president in U.S. history, did not set such a precedent. War emergencies, he argued, were tests to obey the Constitution, not ignore it. His conduct in the War of 1812 is illuminating, and worth reviewing. The War of 1812 was peculiar in that the United States was not under attack, or even the threat of attack. Many, therefore, have argued that the war was avoidable. American commerce, however, was being restricted by the Napoleonic Wars between France and Great Britain. Furthermore, Britain was seizing American ships, kidnapping (“impressing” as it was called) sailors, and stirring Indians in the Northwest to launch raids on American soil. 323 324 A Republic—If We Can Keep It James Madison: The Constitutional War President 325

In the diplomacy that led to war, Madison did not hold press float about $80 million in government bonds; he urged private citizens conferences or buttonhole senators. He let Congress debate the problem to invest in their troops, and he funded most of the war doing that. and pass laws to deal with it. Macon’s Bill No. 2, which Congress passed In an emergency bond drive in 1813, after a series of U.S. military and Madison decided to sign, guided our policy in the two years before defeats, four immigrants stepped up with over $9 million in cash to war. It offered peace and trade to either France or Britain if either keep their adopted country in the fight. These men—German-born John would leave our trade unhampered. Jacob Astor and David Parish, French-born Stephen Girard, and English- When Britain persisted in halting American ships and seizing the born Alexander Dallas—risked their wealth to defend the liberty they sailors, Madison believed the United States should go to war. But he did had used in building their fortunes. not act on this belief until Henry Clay, leading a delegation of congressmen, urged him to support the war publicly before Congress voted on it. This Madison did, and Congress voted (79–49 in the House White House Burned and 19–13 in the Senate) to go to war. During the war the army lost many battles, and some critics have Once war was declared, it had to be funded. The previous year, faulted Madison for appointing weak generals. It’s true that the Congress had refused to re-charter the Bank of the United States, and so Canadians captured Detroit, defended Niagara, and repelled American the nation had no central bank to borrow from. Direct taxes were advances on Canadian soil. Then British troops, fresh from defeating another possibility for raising money, but Madison avoided them during Napoleon, invaded Americ,a burned the White House, and chased much of the war. officials out of Washington, D. C. Instead, Madison, as commander-in-chief, worked with Congress to But Madison recovered well. He had at first appointed veterans of finance the war in part by privatizing it. The navy, for example, lagged the Revolutionary War, men who were senior officers. They did poorly. far behind Britain in ships and manpower. Therefore, Madison urged But by the s u mmer o f 1814, heha d young e r m e n in charg e , and the private shippers to attack Britain, from the American coast to the United States lost no major battle after that. British Isles. An estimated 526 merchants-turned-hunters stalked and Madison handled adversity in a way that preserved individual attacked vulnerable British ships, commercial or naval. Any profits, liberty. When political opponents attacked him for military setbacks, he from cargo or ransom, were split among captains and crew. never jailed them, deported them, or shut down their newspapers—as Some of these private ships were sunk quickly by the British, but did future war presidents. Even when hostile Federalists met to others pestered and perplexed their enemies. The Yankee, from Bristol, consider secession, Madison never interfered with their civil liberties, Rhode Island, and the American, from Salem, Massachusetts, each won or those of anyone else. He asked aliens to register, and that was it. over $1 million in booty. Thomas Boyle, of Baltimore, took his Comet Fighting a constitutional war was sometimes awkward and into British waters and won 40 hit-and-run skirmishes, and then out- disjointed, but it ultimately succeeded. Madison, who had been second- rageously declared Britain to be blockaded. America’s mosquito fleet guessed during the fighting, was commended afterward. His decision to demoralized the Royal Navy and forced Britain to convoy all of their conduct the war in an atmosphere of liberty had helped unify the nation trade in the Atlantic Ocean. and it proved popular at the polls. His Republican Party gained seats on The U.S. army, of course, needed cash for troops and arms. Madison, the Federalists in the off-year elections in 1814. Two years later, James as co-author of The Federalist Papers, was suspicious of centralized Monroe, Madison’s loyal secretary of state, won the presidency in a power and argued persuasively for limited government at the landslide that caused the embarrassed Federalists to virtually disband constitutional convention. He tried to avoid taxing to support the war, as a political party. calling it a dangerous precedent and a recipe for waste and a permanent In Madison’s last year in office, he supported a revenue tariff, not bureaucracy. Instead, he worked with Congress and the Treasury to direct taxes, to help pay back the loyal immigrant bondholders. Within

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20 years, not o nly was th e w ar paid o f f b u t so w as th e entire national debt. The fede ral government was returning a surplus to the states. Marshall Smelser, a historian of the early Republic, ably summarized Madison’s war presidency this way: “Madison’s conduct has brought him condemnation as a weakling. Actually, the father of the 54 Constitution was following his conviction that policy must rise from the people through their branch of government. . . . It is hardly a mark of weakness to take a firm view of the nature of the Constitution and to operate from it as a principle.” —BWF, February 2003

Chapter Fifty-Four

The Economic Costs of the Civil War

Even after 150 years, the Civil War evokes memories of great men and great battles. Certainly that war was a milestone in U.S. history, and on the plus side it reunited the nation and freed the slaves. Few historians, however, describe the costs of the war. Not just the 620,000 individuals who died, or the devastation to southern states, but the economic costs of waging total war. What was the economic impact of the Civil War on American life? The first and most important point is that the Civil War was expensive. In 1860 the U.S. national debt was $65 million. To put that in perspective, the national debt in 1789, the year George Washington took office, was $77 million. In other words, from 1789 to 1860, the United States spanned the continent, fought two major wars, and began its industrial growth—all the while reducing its national debt. We had limited government, few federal expenses, and low taxes. In 1860, on the eve of war, almost all federal revenue derived from the tariff. We had no income tax, no estate tax, and no excise taxes. Even the hated whiskey tax was gone. We had seemingly fulfilled Thomas

327 328 A Republic—If We Can Keep It The Economic Costs of the Civil War 329

Jefferson’s vision: “What farmer, what mechanic, what laborer ever sees The federal government established pension boards to determine a tax-gatherer of the United States?” whether injuries to veterans warranted a pension. But the issue was Four years of civil war changed all that forever. In 1865 the national complex. Sometimes, veterans created or faked injuries; others argued debt stood at $2.7 billion. Just the annual interest on that debt was more that injuries received after the war—for example, falling off of a ladder than twice our entire national budge t in 1860. In fa ct, that Civil War while fixing a roof—were really war injuries. If the pension board debt is almost twice what the federal government spent before 1860. turned down an application, the veteran sometimes pleaded to his congressman—who was often able to get a special pension for his What’s worse, Jefferson’s vision had become a nightmare. The constituent through Congress. The corrupt pension system corroded United States had a progressive income tax, an estate tax, and excise politics for the whole 1865–1900 period. taxes as well. The revenue department had greatly expanded, and tax- gatherers were a big part of the federal bureaucracy. President Grover Cleveland tried to stop congressmen from voting pensions to constituents with bogus injuries by vetoing bill after bill. Furthermore, our currency was tainted. The Union government had His successor, Benjamin Harrison, “solved” the problem by signing the issued more than $430 million in paper money (greenbacks) and Blair bill, which liberalized pensions to the point that even old age made demanded it be legal tender for all debts. No gold backed the notes. a veteran eligible for a pension. During the 1890s, after most veterans The military side of the Civil War ended when Generals Ulysses S. had died, pension payments remained a huge and corrupting item in the Grant and Robert E. Lee shook hands at Appomattox Court House. But federal budget. the economic side of the war endured for generations. The change is The economic impact of the Civil War extended beyond pensions. seen in the annual budgets before and after the war. The 1860 federal One argument made during the war was that transportation needed to budget w a3 s $6 million, b uafhr t ter t e wa, annual b u dgets regularly be improved to connect California with the other Union states. exceeded $300 million. Why the sharp increase? President Lincoln signed a bill establishing federal subsidies for First, the aftermath of war was expensive. Reconstruction building two transcontinental railroads. governments brought bureaucrats to the South to spend money on Lincoln was a gifted writer and an able defender of natural rights, but reunion. More than that, federal pensions to Union veterans became by on railroad subsidies he had a reverse Midas touch. During the 1830s, for far the largest item in the federal budget (except for the interest example, when Lincoln was in the Illinois legislature, he helped lead the payment on the Civil War debt itself). Pensions are part of the costs of charge for a $12 million subsidy to bring railroads to the major cities of war, but the payments are imposed on future generations. In the case of Illinois. Unfortunately for Lincoln, the money was wasted and the the Civil War, veterans received pensions only if they sustained injuries railroads largely went unbuilt. According to William Herndon, Lincoln’s severe enough to keep them from holding a job. Also, widows received law partner, “[T]he internal improvement system, the adoption of which pensions if they remained unmarried, as did their children until they Lincoln had played such a prominent part, had collapsed, with the result became adults. Confederates, of course, received no federal pensions. that Illinois was left with an enormous debt and an empty treasury.”

Pensions and Tensions Bribes Ac ro ss America The Civil War pensions shaped political life in America for the rest When Lincoln signed the transcontinental railroad bill in 1862, he of the century. First, northern states benefited from pension dollars at was creating an even larger boondoggle. The Union Pacific and Central the expense of southern states. That kept sectional tensions high. Pacific Railroads were to be paid by the mile to lay track from Omaha to Second, Republicans “waved the bloody shirt” and blamed Democrats Sacramento. Thus, the UP and CP had incentives to create mileage, but for the war. Republican presidents had incentives to keep the pension not quality mileage. Their railroads were sometimes not straight, and system strong, and the Grand Army of the Republic (GAR) lobbied to get other times went over hilly terrain that was impossible for a train to as much money for veterans as possible.

330 A Republic—If We Can Keep It The Eco nomic Costs of the Civil War 331 surmount. When finished, parts of what they had built were unusable, Speaking of Civil War politicians, those in the Grant but both lines had paid off politicians (with some of their subsidy administration—long maligned by historians—established many of the money) to continue the subsidies and not inquire closely on how they conditions for the freedom and prosperity of the Gilded Age. For were being spent. example, Grant helped make sure the U.S. government had budget Lincoln is not responsible for the corruption that occurred after he surpluses by winning $15.5 million from Britain for damages done to died, but the Republican leaders during the war committed themselves Union ships by the Alabama and other ships the British built for the to many federal interventions other than the constructive one of ending Confederates. In 1875 Grant also signed the Specie Resumption Act, slavery. The National Banking Act of 1863, and amendments to it, which promised to red eem the Civil War greenbacks for gold. Grant brought greater federal control to banking and imposed a 10 p ercent committed the United States to a sound currency and fiscal restraint. tax on state bank notes. Also under Grant, the income and estate taxes were abolished in The Morrill Act of 1862 gave 17.4 million acres of federal land to 1872. He committed the U.S. government to budget surpluses with states to build land-grant colleges to teach citizens agriculture and revenue almost exclusively drawn from tariff duties and excise taxes on science. Gifts of land and statements of educational focus seem like alcohol and tobacco. Even before Grant was able to abolish the income minor interventions, but the Constitution gave no role to the federal tax, he had it changed from a progressive to a flat tax. government in subsidizing education or creating universities. The The income tax during the Civil War—the first in U.S. history—was Morrill Act became an entering wedge for later interventions (the Hatch not onerous by today’s standards. Early in the Civil War, Congress Act of 1887 and the Smith Lever Act of 1914) that established direct passed a flat 3 percent tax on all income over $800 (which was much federal subsidies to those same land-grant colleges. more than most families earned). Then Congress made the tax progres- Once the federal government intervenes in an area, it’s hard to sive and raised the top marginal rate to 10 percent. remove the controls and easy to expand them. The Gilded Age When Grant had the income tax abolished, he returned the nation to generation did, however, halt some of those Civil War interventions. the tax system envisioned by the Founders. In Federalist 21, for Those moves back to freer markets in the late 1800s help account for example, Alexander Hamilton defended a system of consumption taxes the tremendous economic growth during that time. (tariffs and excises) against income taxes—which can be more divisive and more easily manipulated by politicians. Under consumption taxes, Hamilton argued, “The amount to be contributed by each citizen will in Some Rollbacks a degree be at his own option, and can be regulated by an attention to The starting point here is the decision after the Civil War to reduce his resources.” He added, “If duties are too high, they lessen the the $2.7 billion national debt. From 1866 to 1893, the U.S. government consumption. . . . This forms a complete barrier against any material had budget surpluses each year and slashed the national debt to $961 oppressio n of the c itizens by taxes o f this class, and is itself a natural million. Annual revenue during these years was about $350 million and limitation of the power of imposing them.” expenses were about $270 million—most of which consisted of Civil After the Civil War, Americans chose to consume alcohol and War pensions and interest on the national debt. tobacco in sufficient quantities to help pay down the debt each year for One reason the federal budgets tended to be lower in the 1880s most of the rest of the century. American industry recovered under such than in the 1860s and 1870s was that interest payments on the debt limited government, and the Civil War generation paved the way for declined sharply as the debt disappeared. For example, the annual economic greatness. They overcame much of the financial damage from interest on the national debt dropped from $146 million in 1866 to only the Civil War. $23 million in 1893. The generation that fought the Civil War became —BWF, April 2011 the politicians of the Gilded Age, and they had the fortitude to wipe out almost two-thirds of the Civil War debt.

Chapter Fifty-Five

Spanish-American War: Death, Taxes, and Incompetence

“Remember the Maine!” was the battle cry that led America into the Spanish-American War in 1898. The mysterious explosion of the U.S.S. Maine in Havana harbor killed 260 Americans and triggered hostility toward Spain, the suspected culprit. Spain was no threat to U.S. interests, but some Americans wanted to help the Cubans, who were struggling under Spanish rule, and others had visions of creating an American empire. Exactly one hundred years ago, on December 10, 1898, the United States signed the peace treaty ending its short and victorious war with Spain. What is not widely known is, first, how inept the U.S. government was in organizing the war, and second, how the tax code changed as a result of the war. Those changes—higher taxes—became part of American life ever after. The war was expensive, and taxpayers were squeezed. Congress hiked taxes on tobacco and alcohol, and also passed the first inheritance tax in American history. Those higher taxes remained in place after the war (except for a brief repeal of the inheritance tax). Internal revenue 333 334 A Republic—If We Can Keep It Spanish-American War: Death, Taxes, and Incompetence 335 collections never exceeded $162 million in any year from the Civil War and without clear support from President McKinley. In temporary era to 1897. After the Spanish-American War, annual internal revenue retirement, Alger wrote a book, The Spanish-American War, to try to collections never fell below $230 million. During the conflict, the United explain why so much went so wrong. States also recorded its largest deficit since the Civil War years. Those who are too critical of Alger miss a larger point. Incompetent generals, lazy bureaucrats, and a confused secretary of war are the stuff Government Ineptitude of most wars. That’s one reason why wars should be avoided, if possible. What offsets the ineptitude is that America has had a free The man in charge of organizing an army to fight Spain was the people eager to preserve their way of life and willing to overcome secretary of war, Russell Alger—a Detroit lumber baron and former military hardships to do so. governor of Michigan. Most historians of the Spanish-American War say that Alger did a dismal job. At one level, he was weak and unprepared. Within four months and one week after Congress declared war, over On March 9, 1898, six weeks before the U.S. declared war on Spain, 274,000 men had volunteered to put on wool uniforms, endure a Congress allocated $50 million “for national defense and for each and disease-ridden tropical climate, eat bad food, and risk their lives every purpose connected therewith.” But Alger never insisted that any shooting antique guns at menacing Spanish soldiers. Not all of these of it be used to prepare an army to fight. men made it to Cuba, but M.B. Stewart, one who did, said it best this way: “We were doing the best we knew and our lack of knowledge was In April, when the war began, Alger desperately struggled to equip more than outweighed by the magnificent spirit and discipline of both the Army for battles in Cuba. Disaster followed disaster. For example, officers and men.” the soldiers were issued wool uniforms for a summer war in a tropical climate. The mess pans were leftovers from the Civil War. Few soldiers We have two groups, then: the American soldiers, raised in a culture received modern rifles; most ended up with outdated Springfields, and of freedom and willing to preserve it if called upon; and the politicians, some, like Michigan’s 32nd regiment, had no rifles at all and never made who seemed to care more about protecting their careers or building an it overseas. Those who did make it to Cuba ate food so sickening that overseas empire than they did about the lives of soldiers or the taxes on soldiers called it “embalmed beef,” and a special war commission later civilians. Even after the Spanish-American War, politicians missed their investigated what was in it. chance to balance the scales of justice. In 1902, the Michigan legislators selected Russell Alger to be a U.S. senator, and shortly thereafter they Alger, of course, blamed the slow-moving bureaucracy, including built a bronze bust of General Shafter in his hometown of Galesburg. the legions of political appointees in the War Department, for his problems. Alger himself, however, had to take full responsibility for —BWF, December 1998 appointing William R. Shafter as chief general for the Cuban campaign. Shafter, from Galesburg, Michigan, was 62 years old when the war broke out. He moved slowly because he weighed almost 300 pounds. He was ill during most of the fighting, and many questioned his abilities. Teddy Roosevelt, who led the charge up San Juan Hill, said that “not since the campaign of Crassus against the Parthians [over 2,000 years ago] has there been so criminally incompetent a general as Shafter.” Yet in spite of the snafus and bungling, the United States won the war. The Navy, which was well prepared, joined the Army to force a Spanish surrender at Santiago, Cuba. When the war ended, many Americans demanded a formal investigation of why the war department was so inefficient. Secretary Alger resigned in 1899 under heavy criticism

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Chapter Fifty-Six

Don’t Expect Much From Politics

The older I get and the more I learn from observing politics, the more obvious it is that it’s no way to run a business—or almost anything else, for that matter. The deficiencies, absurdities, and perverse incentives inherent in the political process are powerful enough to frustrate anyone with the best of intentions. It frequently exalts ignorance and panders to it. And a few notable exceptions aside, it tends to attract the most mediocre talent with motives that are questionable at best. In 2001 Max Kennedy, the ninth child of Robert and Ethel Kennedy, flirted with the idea of running for political office. A story in the July 15 New York Times Magazine, recounted his ill-fated attempt at a stump speech riddled with trite one-liners like these: “I want to fight for all of you. I’ll commit myself heart and soul to be the kind of congressman who cares about you. I’ll dedicate myself to fighting for working families to have a fair chance. I make you this one pledge: I will always be there for you.”

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338 A Republic—If We Can Keep It Don’t Expect Much From Politics 339

Kennedy’s handler pressed him repeatedly for a “take-away even when government is no larger than what Washington wanted and message,” something of substance that his audience would remember. does its job so well as to be a true “servant,” it’s still “dangerous.” “What do you want people to take away from it?” he asked several Indeed, it’s on this point that all the difference in the world is made. different ways. The would-be candidate stammered and couldn’t think Things that rely on the regular affirmation of voluntary consent don’t of much other than “I’m a nice guy” until finally h e admitted, “I don’t look at all like those that rest on force. Whereas mutual consent know. Whatever it has to be.” encourages actual results and accountability, the political process puts a Eligible for public office? Certainly, though in this case the subject higher premium on the mere promise or claim of results and the fizzled out before his campaign was ever lit, and he has presumably shifting of blame to other parties. found useful work elsewhere. Hundreds just like Max Kennedy get To win or keep your patronage and support, a provider of goods or elected every year. But would it ever occur to you to put someone who services must manufacture something of real value. A business that talks this way in charge of your business? Outside of politics, is there doesn’t produce or a charity that doesn’t meet a need will quickly any other endeavor in which such nonsense is as epidemic? disappear. To get your vote, one politician only has to look or sound Welcome to the silly side of politics. It’s characterized by no-speak, better than the next, even if both of them would renege on more pledges doublespeak, and stupidspeak—the use of one’s tongue, lips, and other than they would keep. In the free marketplace, you almost always get speechmaking body parts to sway minds without ever educating them, what you pay for and pay for what you get. As a potential customer, you and deceiving them if necessary. The serious side of politics comes can say, “No, thanks,” and take a walk. In politics the connection afterwards when the elected actually do something, even if—as is often between what you pay for and what you actually get is problematic at the case—it bears little resemblance to what they promised. It’s serious best. business in any case because it’s the part where coercion puts flesh on This is another way of asserting that your vote in the marketplace the rhetorical bones. What makes a politician a politician, and counts for so much more than your vote in the polling booth. Cast your differentiates politics from all other walks of life, is that the politician’s dollars for the washing machine of your choice and that’s what you words are backed up by his ability to deploy legal force. get—nothing more and nothing less. Pull the lever for the politician of This is not a trivial point. After all, in the grand scheme of life there your choice and most of the time, if you’re lucky, you’ll get some of what are ultimately only two ways to get what you want. You can rely on you do want and much of what you don’t. And the votes of a special- voluntary action (work, production, trade, persuasion, and charity) or interest lobby may ultimately cancel yours out. you can swipe. Exemplars of voluntary action are Mother Teresa, Henry Some politicians like to rail against a practice in the private sector Ford, Bill Gates, J.K. Rowling, and the kid who delivers your newspaper. they call “bundling.” If you want to buy a company’s computer operating When s omene o who isn’t elected or appointed to any post in system, for example, you may also have to buy his Internet browser. government swipes something, he’s a thief. That’s not much different from what happens at your local bookstore: If acting in his capacity as a government official, one who might you may only want chapter one, but you’ve got to buy the whole book. otherwise be thought of as a thief is considered at least by many to be a But if “bundling” is a crime, then politics is Public Enemy No. 1. In some “public servant.” And he’s not swiping, he’s “appropriating.” elections t h e options range from Scarface to Machine Gun Kelly. Politics may not be the oldest profession, but the results are often the same. Neither Reason Nor Eloquence These important distinctions between voluntary, civil society and coercion-based government explain why in politics the Max Kennedy- No generation ever grasped the meaning of this better than that of types are the rule rather than the exception. Say little or nothing, or say America’s Founders. George Washington is credited with having silly things, or say one thing and do another—and your prospects of declared that “Government is not reason. It is not eloquence. It is force. success may only be enhanced. When the customers are captives, the Like fire, it is a dangerous servant and a fearful master.” In other words,

340 A Republic—If We Can Keep It seller may just as easily be the one who whispers seductive nonsense in About the Authors their ears as the one who puts something real on their plates. Like it or not, people judge private, voluntary activities by a higher standard than they do public acts of the political process. That’s all the Lawrence W. Reed has served as president of the more reason to keep politics a small and isolated corner of our lives. We Foundation for Economic Education since Septem- all have so many more productive things to tend to. ber 1, 2008. Prior to that, he was president for twenty —LWR, December 2001 years of the Mackinac Center for Public Policy in Midland, Michigan. Reed has authored over 1,000 columns and articles in dozens of newspapers, mag- azines and journals in the U. S. and abroad, as well as five books. H e has lectured in dozens of nations. Reed’s articles have appeared in The Wall Street Journal, Christian Science Monitor, USA Today, Baltimore Sun, Detroit News and Detroit Free Press, among many others. His interests in political and economic affairs have taken him to 78 countries on six continents. He holds a B.A. degree in Economics from Grove City College (1975) and an M.A. degree in History from Slippery Rock State University (1978), both in Pennsylvania. He holds two honorary doctorates from Central Michigan University (Public Administration, 1993) and Northwood University (Laws, 2008). He is a member of the Mont Pelerin Society and is an advisor to numerous organizations around the world. A full bio is available at FEE.org and on Wikipedia.

Burton Folsom is the Charles Kline Professor of History and Management at Hillsdale College and senior historian for the Foundation for Economic Education. He holds a Ph.D from the University of Pittsburgh. He lectures widely throughout the U.S. and is a regular speaker at FEE's summer seminars for college students. Folsom has publshed seven books, including the widely acclaimed The Myth of the Robber Barons, now in its sixth edition. His work on the first two terms of Franklin Roosevelt, New Deal or Raw Deal?, is considered a ground-breaking revision of the FDR myth. The sequel, co-authored with his wife Anita, is FDR Goes to War (Simon & Schuster, 2011). He and his wife write for their blog at www.BurtFolsom.com.

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